Long-Term Returns on the Original S&P 500 Companies

Jeremy J. Siegel and Jeremy D. Schwartz

Financial Analysts Journal, 2006, vol. 62, issue 1, 18-31

Abstract: The S&P 500 Index is continually updated, with approximately 20 companies added each year and an equal number dropped. In the study reported here, the returns to all 500 of the original S&P 500 companies and returns to the continually updated index were calculated from March 1957 through 2003. Contrary to earlier research, this study found that the buy-and-hold returns of the 500 original companies have been higher than the returns to the continually updated S&P 500 and with lower risk. Furthermore, the original companies in 9 of the 10 industry sectors outperformed the new companies added to the index. The S&P 500 Index, first compiled in March 1957, is the most widely used benchmark for measuring the performance of large-capitalization, U.S.-based stocks. The index of 500 stocks is continually updated; approximately 20 new companies that meet the Standard & Poor's Corporation criteria for market value, earnings, and liquidity are added each year, and an equal number are deleted because they fall below these standards or are eliminated by mergers or other corporate changes.We calculated the returns of all 500 of the original S&P 500 companies and of the new companies subsequently added to the index. Contrary to earlier studies, we found that the buy-and-hold returns of the 500 original companies have been higher than the returns of the continually updated S&P 500 and with lower risk. Moreover, the new companies added to the S&P 500 since 1957 have underperformed the original companies in 9 of the 10 industrial sectors making up the index.We also found that less than one-third of a sector's return from 1957 through 2003 can be attributed to the expansion and contraction of the sector's market value relative to the S&P 500. Sector differences in dividend yields, capitalizations, and number of companies entering and exiting the sector accounted for more than two-thirds of the changes in market return.Reasons for the underperformance of the continually updated S&P 500 include price pressures when the addition of a company to the index is announced, investor overoptimism about certain stocks and industries, and the changes in sector weighting since 1957. Over time, the original S&P 500 companies became more heavily weighted with high-dividend-paying and low-P/E (value) stocks, particularly large oil producers. Indeed, this research supports the finding that value stocks have outperformed growth stocks on a risk-adjusted basis since 1957.

Date: 2006
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DOI: 10.2469/faj.v62.n1.4055

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