Indexology^® Blog

Enthusiasm over artificial intelligence (AI) has been one of the driving market forces in recent years, with investors’ expectations that certain companies stand to reap particular rewards from the application of AI propelling their valuations.

This dynamic contributed to narrowing leadership among public equity market barometers and, coupled with a growing penchant for companies looking beyond Earth’s limits, helped to explain a 1,500% increase in the collective valuations of the 10 largest venture-backed U.S. companies since March 2021 (see Exhibit 1).

The anticipated initial public offerings (IPOs) later this year from some of these companies—including SpaceX, OpenAI, Anthropic and Databricks—have been met with much enthusiasm. Many market participants have started to wonder when such companies could be eligible for addition to various U.S. equity indices, especially the S&P 500^® given it is widely viewed as the preeminent U.S. equity gauge.

Collectively, recent valuations of the 10 largest venture-backed U.S. companies would imply (assuming a full IPO of all stock) that they would make up around 4.5% of the S&P 500 if they joined—more than the weight of the Energy sector, but less than that of Microsoft.

Exhibit 2 outlines the addition criteria that companies must meet to be considered eligible for The 500^®. IPOs need to be traded on an eligible exchange for at least 12 months, and index additions must meet size requirements, financial viability and liquidity thresholds, among other criteria. Importantly, index addition is not guaranteed simply by meeting all the eligibility criteria; the index committee is also mindful of other factors such as index turnover and sector balance when considering constituent changes.

The holistic approach to identifying eligible S&P 500 companies can help to distinguish between companies whose elevated valuations may be short lived versus those that are more reflective of the large-cap U.S. equity segment.

The IPO seasoning period is useful in this endeavor given that various eligibility criteria are measured over 12-month periods, but IPO seasoning can also support index replicability. It is common for some investors to be prevented from selling shares for a predetermined time after an IPO; these lockup periods could pose challenges to index trackers that are looking to purchase enough company shares to replicate index weights.

Even if the expected IPOs may not be immediately included under the current methodology, their anticipated scale has motivated market participants to question whether changing the methodology would better support the S&P 500’s objective of representing the large-cap U.S. equity segment. Proponents of IPO fast track eligibility may point to the fact that free float-adjusting index weights, as in the S&P 500, could mitigate replicability concerns, but there are valid arguments in both directions.

Importantly, index methodologies do evolve to ensure that indices continue to represent the market segments they measure, and to ensure indices remain investable and replicable. Indeed, an important role of the index committee is to remain abreast of prevailing market dynamics and longer-term changes to market structure, and where appropriate seek feedback from market participants. Significant methodology changes tend to incorporate public consultations, providing market participants with the opportunity to share their feedback and perspectives on the results.²

In the meantime, S&P Dow Jones Indices maintains other U.S. equity indices that allow fast track IPO eligibility. For example, the S&P Total Market Index and the Dow Jones U.S. Total Stock Market Index require IPO fast track candidates to meet various rules (see Exhibit 3). Unless exceptions are made, candidates must also meet the underlying index eligibility rules, such as requiring at least 10% of a company’s market capitalization to be available to trade.

As a result, the recent focus on IPO eligibility for various indices provides us with an opportunity to examine the potential treatment. The S&P 500’s 12-month IPO seasoning period aligns with holistic assessments of the large-cap U.S. equity segment, while other S&P DJI U.S. equity indices allow for the possibility of fast track IPO entry. While more details may emerge on anticipated IPOs, readers may rely on our public methodologies and processes to stay informed of their future index treatment.

¹ For more information see the S&P U.S. Indices Methodology.

² A current list of open consultations and related announcements is maintained here.

In a market defined by shifting cycles, tightening financial conditions and an increasingly high bar for corporate discipline, resilience isn’t just a desirable trait—it’s a differentiator. The S&P 500^® Resilient Shareholder Yield Index identifies companies that balance rewarding shareholders with the financial strength needed to sustain those rewards over time. Its shareholder yield framework aggregates dividends, net buybacks and net debt reduction to reflect total capital return, while complementary quality metrics emphasize durable fundamentals.

YTD Outperformance of the Benchmark

Year-to-date, the S&P 500 Resilient Shareholder Yield Index has outperformed the S&P 500 by 10%. This builds on its robust performance from the index’s first year of live history, when it gained 21.04%, contributing to a 5.80% cumulative outperformance relative to the S&P 500 since its launch on Dec. 2, 2024.

Methodology Overview

The methodology for the S&P 500 Resilient Shareholder Yield Index identifies companies with high shareholder yield while maintaining financial quality. This process begins by excluding companies with a shareholder yield above 25%, which removes high yielding firms that may point to structural challenges or financial distress.

Remaining companies are ranked using four metrics: two focused on consistent capital return generation (shareholder yield and capital return growth) and two quality measures (return on equity and free cash flow-to-total debt). Companies are scored and ranked based on their average performance across these metrics, with the top 100 selected for inclusion. Constituents are then weighted proportionally to their float-adjusted market capitalization (FMC) multiplied by their shareholder yield.

Back-Tested Historical Performance

Over the long-term back-tested period, the index has delivered an annualized gain of 10.89%, outperforming its benchmark by 5.63%. Notably, this was achieved with a lower overall annualized volatility, leading to higher risk-adjusted performance than the benchmark.

Defensive Characteristics

The S&P 500 Resilient Shareholder Yield Index has historically exhibited defensive characteristics, particularly during periods of elevated market volatility. Back-tested results show that when volatility increased—measured by VIX^® levels above 20—the index tended to outperform relative to the S&P 500.

Macroeconomic Performance

Examining the index’s back-tested performance across different macroeconomic environments shows that it has delivered its strongest outperformance during periods of rising inflation—especially when economic growth was slowing. Although these environments have historically challenged broader equity markets, companies with disciplined capital allocation, strong cash generation and balance sheet flexibility have proven to be more resilient.

Sector Weights

The sector composition of the S&P 500 Resilient Shareholder Yield Index has historically favored Industrials and Consumer Staples while maintaining an underweight position in Financials. Currently, the index shows a pronounced underweight to Information Technology, alongside increased weight to Health Care, Energy and Industrials—reflecting a tilt toward more resilient cash flows and balance sheets.

Conclusion

Taken together, the historical evidence suggests that the S&P 500 Resilient Shareholder Yield Index lives up to its name. It has demonstrated an ability to participate meaningfully in rising markets while offering resilience during more challenging regimes. For market participants seeking an index that screens for companies that combine consistent capital return and financial discipline, the S&P 500 Resilient Shareholder Yield Index may offer a compelling framework for navigating changing market conditions.

The investment landscape is in a perpetual state of evolution, with market participants continually seeking innovative tools. In recent years, options-based strategies—particularly those delivered through an ETF wrapper—have surged in popularity. Once the domain of institutional investors or structured product users, options-based strategies like covered call and buffered strategies have been democratized. This growth represents a significant shift that could reshape how a wider range of investors approach portfolio construction and navigate market volatility.

The Engine of Growth: Accessibility and Market Needs

The proliferation of options-based ETFs has been a notable development, providing investors with a generally easier-to-own and more liquid vehicle for accessing these strategies. As shown in Exhibit 1, their asset growth has been exponential, particularly in the last five years. Beyond the regulatory changes, this reflects an environment where traditional cross-asset correlations have shifted, and investors are increasingly looking beyond the conventional 60/40 portfolio for diversification and risk mitigation.

Two strategies have captured the lion’s share of this growth: covered call and buffered strategies. Covered call strategies focus on generating income by selling call options against invested assets, while buffered strategies aim to provide a specific level of downside protection in exchange for a cap on upside participation. By writing call options or buying put options, both strategies have historically made investment returns steadier and more predictable. A rolling one-year performance comparison of representative S&P 500^® covered call and buffered indices versus the S&P 500 over the past 14 years shows that covered call and buffered indices delivered performance in the 0-15% range in more than two-thirds of the periods, compared to only one-third for the S&P 500.

The Foundational Role of Indices

Indices play a multifaceted, critical role in this expanding landscape. First and foremost, liquid and well-established equity benchmarks serve as the core component of the majority of these strategies. The S&P 500 is the preeminent choice, with its robust trading ecosystem: the high liquidity and tight bid-ask spreads in S&P 500 options facilitate the effective implementation of various strategies, from daily covered calls to one-year buffered products, catering to a wide spectrum of investment objectives.

Indices also serve as essential benchmarks for both active and passive options-based strategies. In a market crowded with funds described as actively managed, the ability to compare performance against a transparent and rules-based benchmark is paramount. Indices allow investors to dissect performance, understand the drivers of return and make informed decisions about whether a particular strategy is delivering on its objectives, ultimately fostering greater accountability and trust.

As investors continue to seek solutions that enhance portfolio resilience and adopt a more balanced approach to navigating market volatility, the relevance of options-based strategy indices could be expected to grow further. For a deeper dive into this topic, please refer to our recently published paper, “Defining Paths with Options-Based Index Strategies.”

How are indices bringing greater transparency to Saudi Arabia’s sukuk and fixed income markets? S&P DJI’s Jessica Tan joins GCMA’s Michael Grifferty for a closer look at the trends driving the evolution of these markets and how index-based tools are helping market participants evaluate the region’s opportunity set.  

Canada’s investment landscape is often defined by the S&P/TSX 60, the benchmark that comprises the nation’s largest companies. These larger-cap companies—predominantly Financials and Energy firms—tend to lead headlines for portfolio allocations. Yet beneath the top tier of widely recognized names exists a dynamic segment that focuses on emerging leadership, innovation and diversification in Canada’s public markets.

The group of companies ranked just outside the flagship S&P/TSX 60—referred to here as the “Next 40”—reflect an important segment with the potential to transition to the S&P/TSX 60. This group represents a blend of mid-sized companies and emerging smaller caps with high potential, making the Next 40 a potential signal for the direction of the Canadian economy.

The Next 40 consists of the 40 largest constituents of the S&P/TSX Completion Index. Rebalancing quarterly on the third Friday of March, June, September and December, this basket maintains strict modularity with the flagship S&P/TSX 60. To preserve the distinction, any constituent added to the S&P/TSX 60 is removed from the Next 40 on an intra-quarter basis and replaced, ensuring no overlap between the two tiers.

Over the period studied, the Next 40 tracked most closely to the S&P/TSX Completion Index, while also remaining competitive with the flagship S&P/TSX 60 and the broader S&P/TSX Composite Index (see Exhibit 2). Specifically, the Next 40 maintained a tracking error above 7% against the large-cap flagship, demonstrating that it was measuring a distinct market segment rather than acting as a redundant proxy. By contrast, its lower tracking error against the S&P/TSX Completion Index shows that it has historically been a reliable representation of the market, avoiding the unpredictability often found in smaller, less liquid stocks.

While the Next 40 tracked closely to the S&P/TSX Completion Index, it can act as a strategic filter that narrows the universe down to its most impactful stocks. By omitting smaller constituents that have historically underperformed, the Next 40 could serve as a more efficient version of the S&P/TSX Completion Index, focusing on how specific names tended to perform better than their peers over the 10-year period reflected in Exhibit 2. As shown in Exhibit 3, this refinement allowed the components in this statistic to populate the top-tier brackets—specifically those with a total return exceeding 150%—more consistently than the broader universe.

While the S&P/TSX 60 tends to be characterized by heavy concentration in mega-cap entities, the Next 40 has tended to have more balanced weights, with the largest constituent holding a weight of only 6.39% (see Exhibit 4). This differentiation is further supported by the varied sector contribution over the years (see Exhibit 5). While Financials remained a core pillar, sectors like Industrials and Materials have gained meaningful participation as well.

The Next 40 represents a compromise between size stability and growth dynamism. Over the 10-year period, the S&P/TSX Composite Index and the S&P/TSX 60 had high annualized returns. The Next 40 had only slightly higher volatility than the S&P/TSX 60, which reinforces its focus on the largest, most established firms outside of the traditional top tier.

Conclusion

The Next 40 is more than just an overflow list: it’s an indicator of the more liquid mid-cap segment of Canadian equities. By moving beyond the mega-cap concentration of the S&P/TSX 60, the Next 40 reduces focus on a handful of giants by seeking innovation in sectors that tend to be under-represented in the top tier. For a broader perspective on Canadian equities, incorporating a structured view of these firms may provide a fresh lens into where growth and innovation may emerge.

The author would like to thank Tom Phillips for producing analysis and data underlying this post.