Introducing the S&P 500® 3% Capped Index: Tracking U.S. Equities with a Focus on Lower Concentration

Introduction

The S&P 500 is widely regarded as the premier gauge of the large-cap segment of the U.S. equity market.  While the index’s global relevance remains, current market trends may raise concerns about increased concentration in this segment.  To address these concerns while offering a comparable index, S&P Dow Jones Indices (S&P DJI), the world’s leading index provider, recently launched the S&P 500 3% Capped Index.  This index measures the benchmark S&P 500 but imposes capped weights on the index constituents.

Methodology Overview: The Capping Mechanism

The S&P 500 3% Capped Index’s universe is S&P 500 constituents, but the index imposes a cap weight of 3% on each company at every quarterly rebalancing.  The process is straightforward: if any company breaches the cap at rebalancing, its weight is reduced to 3%, and any excess weight is redistributed proportionally among all uncapped companies.  This process is repeated iteratively until no company exceeds the cap.

Index Sector Weights and Stock Concentration Relative to the Headline S&P 500

As a direct result of the 3% company cap, the index exhibits different weights at the stock and sector levels.  If stock concentration in the S&P 500 rises, the index will be overweight or underweight in different sectors relative to its benchmark index.  Using the adjusted HHI as a metric to measure concentration—the higher the adjusted HHI, the higher the concentration—Exhibit 1 shows that concentration levels have been stable for the S&P 500 3% Capped Index but have been increasing for the S&P 500, with levels significantly above the historical average.

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