vesting in large U.S. stocks was compared. The S&P 500 Index originally
contained exactly 425 industrial, 25 rail, and 50 utility firms, but these
groupings were abandoned in 1988 in order to maintain, as S&P
claimed, an index that included “500 leading companies in leading in-
dustries of the economy.”
Since its creation, the index has been continually updated by
adding new firms that meet Standard & Poor’s criteria for market value,
earnings, and liquidity while deleting an equal number that fall below
these standards.^1 The total number of new firms added to the S&P 500
Index from its inception in 1957 through 2006 was 987, an average of
about 20 per year. On average the new firms constitute about 5 percent
of the market value of the index.
The highest number of new firms added to the index in a single
year occurred in 1976, when Standard & Poor’s added 60 firms includ-
ing 15 banks and 10 insurance carriers. Until that year, the only financial
stocks in the index were consumer finance companies because banks
and insurance companies were traded in the “over-the-counter” (OTC)
market and timely price data were not available until the Nasdaq Ex-
change began in 1971. In 2000, at the peak of the technology bubble, 49
new firms were added to the index, the highest since Nasdaq stocks
were included in 1976. In 2003, just after the bottom of the subsequent
bear market, the number of additions fell to a record-tying low of 8.
SECTOR ROTATION IN THE S&P 500 INDEX
The evolution of the U.S. economy during the past half century has
brought about profound changes in its industrial landscape. Steel,
chemical, auto, and oil companies once dominated our economy.
Today healthcare, technology, finance, and other consumer services
firms hold sway.
Increasingly, active investors are using sector analysis to allocate
their portfolios. The most popular industry classification system was
formulated in 1999 when Standard & Poor’s joined Morgan Stanley to
create the Global Industrial Classification Standard (GICS). This system
arose from the earlier Standard Industrial Code (SIC) system devised by
the U.S. government that had grown less suited to our service-based
economy.^2
52 PART 1 The Verdict of History
(^1) Criteria for listing and other information are found on Standard & Poor’s Web site www2.standard
andpoors.com/spf/pdf/index/500factsheet.pdf.
(^2) In 1997 the SIC codes were expanded to include firms in Canada and Mexico, and the revised list-
ing was renamed the North American Industrial Classification System (NAICS).