The S&P 500 consists of 500 companies from a diverse range of industries. It is not a simple list of the largest 500 companies by market capitalization or by revenues, as some mistakenly believe. Rather, it is 500 of the most widely held U.S.-based common stocks, chosen by the S&P Index Committee for market size, liquidity, and sector representation. The S&P 500 currently represents approximately 80% of the total market capitalization of all U.S. stocks. Since the mid-70s, the S&P 500 is most commonly used by money managers as a measure of performance as it is a good representation of the “stock market”. As a result, Scholtz & Company measures the return on its equities against this benchmark. The one exception is in regards to our Small Cap Equity strategy which measures itself against the Russell 2000 index. The Russell 2000 is a market cap weighted index of smaller companies (market cap’s typically $3 billion or less).
Similarly, Scholtz & Company measures the performance of the bonds it owns against the Barclays U.S. Aggregate Bond Index. This index comprises government, mortgage-backed, asset-backed and corporate securities in order to simulate the universe of bonds in the market. This bond index is considered to be the best overall benchmark for bonds as it is used by over 90% of investors in the United States. Both the Balanced and Income strategies at Scholtz & Company employ the Barclays U.S. Aggregate Bond Index in their benchmark construction, differing only in the weight of the index in the benchmark. A sub-set of the Barclays U.S. Aggregate Bond index is their municipal bond index, which focuses on investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million. It is a solid benchmark for our taxable accounts which hold a large number of municipal bonds.
An article on USA Today’s website helps to articulate the need for benchmarks as a true indication of performance as opposed to strictly analyzing absolute returns.