The S&P 500 is like the most popular girl in school. Everyone knows her name and the details of her life, even if they don’t know her personally. And while everyone has been hyper-focused on what she’s doing, they’ve completely missed out on getting to know her big sister, the S&P 1500.
She may be flying under the radar, but the S&P 1500 has all of the great qualities her more popular sister does, and then some. To help you get to know her better, here are all of the details on who the S&P 1500 is and whether you should invest in her or the S&P 500.
Who Is the S&P 1500 Index?
The S&P 1500 is an index that tracks the famous S&P 500, as well as the S&P 400 and S&P 600. Haven’t heard of the S&P 400 or 600 either? Not surprising, but they all have something in common. Like the 500, they’re indices that track the performance of several hundred US companies. What sets them apart is the size, or market cap, of the companies they track.
Market capitalization, or market cap for short, is the total value of all outstanding shares of stock in a company. For example, if a company has 100,000 shares of stock trading at $50 per share, the company’s total market cap is $5,000,000 (100,000 shares x $50).
Each of the S&P indices tracks a different sector of the market based on market cap. The S&P 500 index only tracks large-cap companies, some of which are the most high-profile companies in the US.
An investor needs to know the market cap of any funds or companies they invest in because a company’s size impacts how risky it is. In general, large-cap companies are the least risky because they are better established and tend to be market leaders in their industry. The risk of them going bankrupt is much smaller than it is for a small-cap company that is in an emerging and unpredictable industry and has only been in business for a few years.
Think Coke vs a CBD company. Coke has solidified its place in the beverage space and is the market leader in its industry, making it unlikely to go defunct in the next 20 to 30 years. On the other hand, while CBD is extremely popular right now, it’s a relatively new product and has a much higher probability of fading away over the next few decades. If that happens, CBD companies will be nonexistent.
To help you understand the difference between the S&P 500, 400, and 600, here is a breakdown of the market cap and risk level of each index.
The S&P 500
- Typical market cap above $10 billion
- Risk – Lowest
The S&P 400
- Typical market cap between $2-10 billion
- Risk – Medium
The S&P 600
- Typical market cap under $2 billion
- Risk – Highest
Should You Invest in the S&P 500 or the S&P 1500?
One of the number one rules of finance is the greater the risk, the greater the expected or required reward. In layman’s terms, that means the riskier something is, the more money you can expect to make from it. Unfortunately, with a larger upside also comes a higher possibility of losing money.
Since the S&P 1500 contains small and mid-cap companies, it is a riskier investment than the S&P 500, again because the 500 only contains large-cap companies which are less likely to fail. While your odds of losing money are lower, that also means that if a smaller company in the S&P 400 or 600 breaks out, you’ll miss out on the earnings from its above-average performance.
The bump you get in overall market coverage by investing in the S&P 1500 vs the S&P 500 may seem small at only a 10% increase, but that’s nothing to scoff at. Buying the S&P 1500 means you’re investing in 90% of the entire value of the US stock market vs only investing in 80% of the market with the S&P 500. And remember that those smaller companies now could turn into the next Google or Facebook.
My Overall Assessment
If you can handle the added risk, invest in the S&P 1500. If you’re really risky, invest more heavily in the S&P 400 and 600, which have both historically outperformed the S&P 500 and 1500. If all of this talk about risk makes you anxious, stick to the popular sister you already know, the S&P 500.
*full disclosure: I am invested in an S&P 1500 ETF.
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[…] and seek to achieve the same return as those investments. A popular example of this is an S&P 500 index fund or […]