Fortune 500 vs. S&P 500: A Clash of the Titans for Investors

Definition & History

Fortune 500

• Definition: A list of the 500 largest publicly traded companies in the United States, ranked by revenue.
• History: First published in 1955 by Fortune magazine.

S&P 500

• Definition: A stock market index that tracks the performance of the 500 largest publicly traded companies in the United States.
• History: First created by Standard & Poor's in 1957.

Composition & Performance

Fortune 500

• Composition: Dominated by industries such as energy, technology, finance, and healthcare.
• Performance: Has outperformed the S&P 500 over the past decade, with an average annual return of 8.5% versus 6.9%.

S&P 500

• Composition: More diversified across various industries, including consumer goods, technology, healthcare, and financials.
• Performance: Provides a broader representation of the U.S. stock market and has historically exhibited lower volatility than the Fortune 500.

Risk & Reward

Fortune 500

• Risk: Higher concentration in a few dominant industries, making it more susceptible to industry downturns.
• Reward: Potential for higher returns due to the size and influence of its constituent companies.

S&P 500

• Risk: Lower risk due to its broad diversification across multiple industries.
• Reward: Provides a more stable and consistent return profile with less sector-specific risk.

Diversification & Investment Strategy

Diversification:

• Fortune 500: Offers less diversification due to its concentration in a few large-cap companies.
• S&P 500: Provides greater diversification by tracking a broader range of businesses.

Investment Strategy:

• Fortune 500: Suitable for investors seeking exposure to the largest and most established companies in the U.S., with potential for higher returns but also higher risk.
• S&P 500: Ideal for investors seeking a more diversified and stable exposure to the U.S. stock market, with lower risk but possibly lower returns.

Top Performers & Industry Trends

Fortune 500 (2022)

• Top 5 Companies by Revenue: Apple, Microsoft, Amazon, Berkshire Hathaway, ExxonMobil

S&P 500 (2022)

• Top 5 Companies by Weight: Apple, Microsoft, Alphabet, Amazon, Tesla

Industry Trends:

• Growth in Technology: Both the Fortune 500 and S&P 500 have seen a significant increase in the weighting of technology companies, reflecting the rise of the digital economy.
• Diversification in Energy: The Fortune 500 has witnessed a diversification away from traditional energy sectors towards renewable energy and clean technology.

A Deeper Dive into Fortune 500 & S&P 500

Market Capitalization

• Fortune 500: Represents approximately 70% of the total market capitalization of all U.S. publicly traded companies.
• S&P 500: Represents approximately 80% of the U.S. stock market capitalization.

Dividend Yield

• Fortune 500: Has a slightly higher average dividend yield than the S&P 500, reflecting the maturity and stability of its constituent companies.
• S&P 500: Provides a more modest dividend yield but has exhibited consistent dividend growth over time.

Correlation

• Fortune 500 and S&P 500: Exhibit a strong positive correlation, indicating that they often move in tandem. However, the Fortune 500 has recently outperformed the S&P 500 due to the growth of its technology-related companies.

Common Mistakes to Avoid

• Overweighting the Fortune 500: While the Fortune 500 offers potential for high returns, it is important to diversify across different industries and market caps.
• Ignoring the S&P 500: The S&P 500 provides a more balanced representation of the U.S. stock market and should not be overlooked in a diversified portfolio.
• Chasing Returns: Avoid the temptation to invest heavily in the top-performing companies of the Fortune 500 or S&P 500. Instead, focus on long-term performance and diversification.

Tables

Table 1: Fortune 500 vs. S&P 500 Characteristics

Table 2: Top 5 Companies by Revenue in the Fortune 500 (2022)

Table 3: Top 5 Companies by Weight in the S&P 500 (2022)

Table 4: Correlation between Fortune 500 and S&P 500