During a recent retreat to the Blue Ridge Mountains, I picked up a copy of Outside Magazine’s 40th Anniversary issue. Nursing two fingers of bourbon, I paged through their feature on the seven most classic pieces of adventure gear. Generally, it’s a great list. Number 4, Ray-Ban Aviators? Absolutely. Number 7, Birkenstock sandals? Yeah…no. But then, I never was much of a fan of The Grateful Dead.
Being an index geek, I found myself ruminating on the classics of indexing (yes, I’ll concede that’s a little sad). What, I pondered, were the seminal pieces of benchmark design, those major milestones in the evolution of the passive discipline? I suspect more learned (and less rushed) experts would: a) find more than seven selections and b) most likely argue with my choices and omissions. But this is my blog post, so…
Dow Jones Railroad Average (1884): Many often mistakenly credit the Dow Jones Industrial Average® as the first mainstream stock market index. In fact, that honor falls to Charles Dow’s Railroad Average, created 12 years prior to the DJIA. At the time, railroads dominated the corporate ranks and represented the natural subject for Dow’s first index of share price performance (though, in fact, 2 of the original 11 companies—Western Union and the Pacific Mail Steamship Company—were not railroads at all). Price-weighted,—the only methodology realistically available to Mr. Dow at genesis—the Dow Jones Railroad Average was renamed the Dow Jones Transportation Average in 1970 to reflect the increasing diversity of its composition (airlines, marine, delivery services, etc.).
S&P 500® (1957): Originally launched in 1923 as the “Standard Composite Stock Price Index”—and tracking only 223 companies at inception—the S&P 500 reached its namesake component count in 1957, an advancement made possible by the application of computing power to the daily calculation. The S&P 500 and its predecessors were capitalization-weighted (unlike the Dow Averages), so a company’s weight in the index is proportionate to its total value, not just to its stock price. Until April 1988, the index held fixed sector allocations of 400 industrials, 20 transports, 40 utilities, and 40 financials. Those counts were abandoned as, again, the landscape of listed U.S. companies evolved; today, the S&P 500 includes representation from all 11 GICS® sectors. Most knowledgeable observers know that the S&P 500 comprises 500 large U.S. companies, not the 500 largest U.S. companies. Maintained by the S&P Dow Jones Index Committee, the S&P 500 is the definitive benchmark for the large cap stock market and the standard against which market participants are most commonly measured. As our SPIVA research repeatedly bears out, it’s a standard that most professional money managers fail to beat.
S&P GSCI (1991): While not the world’s first commodity index, the S&P GSCI was the first readily tradable commodity index and thus offered much greater utility. Prior attempts at the indexation of price movements within the commodities market included less liquid futures contracts and spot commodity prices, which are generally inaccessible by the investing public. Originally developed by Goldman Sachs (hence the “GS”), the S&P GSCI only includes the most liquid commodity futures and is weighted according to the global production of constituent commodities to ensure that influence aligns with economic significance. In the nearly three decades since its launch, the flagship index—and its many sector, strategy, and enhanced progeny—has been the leading market barometer as market participants have increasingly accepted the diversification benefits of commodities.
To be continued…The posts on this blog are opinions, not advice. Please read our Disclaimers.