The S&P 500 is an index of U.S. companies. But, exactly what a U.S. company is can be complicated. Traditionally being U.S. company meant being incorporated in the US. However, in the last few years companies that many think of as being American are not incorporated here. Nielsen Holding, the company which compiles ratings of television shows and other entertainment is one, Seagate Technology; a manufacturer of computer components is another. Oil drillers, insurance companies and many more are also US companies incorporated someplace else. On the other hand, there are companies with little business here that incorporate in the U.S. or other developed countries because of the legal system or the financial markets.
All this moving around is recognized by investors who no longer judge which country a company is in only by its incorporation. Other things are more important: where does the stock trade? Which country’s financial reporting rules apply? Which regulator will go after the company? Where is the company doing business? Where are its competitors? All these things matter, often far more than incorporation. Indices and index construction should reflect the markets as seen and understood by investors, not as mapped by the lawyer who filed incorporation papers many years ago.
Over the last several years S&P Dow Jones Indices consulted with investors about the best way to assign companies to countries so that our indices are most useful for analyzing markets and supporting investment products. The results of this effort can be seen in the methodology for the S&P 500 and our U.S. indices. These guidelines good back several years and haven’t changed recently.
The approach focuses on some key factors: U.S. companies are listed on either the New York Stock Exchange or NASDAQ and file their financial reports with the SEC as a US company on form 10-K. (Foreign companies often file financials with the SEC, but on a different form). Additionally, we consider where the assets, revenues and employees are located and how corporate governance is structured. And we do look at where the company is incorporated.
If the index only considered incorporation, several companies and some key industries would be missing from the 500. And, they might be replaced by companies incorporated here but with little or any local business or employees or presence, or investors, in the U.S.