Investing Market Update: September 2023

The big news for September comes from the US, where they had the most significant rebalancing of the S&P 500 since 2017. For this month’s investing market update, I’m going to get into the details about index rebalances, so you know exactly what they mean for you and your investments.

 

What is an index?

Top level, an index is a grouping of different companies. It’s used to measure or track the collective performance of these companies. In doing so, the index will provide an insight into not only how these companies are performing, but how different sectors of an economy are performing, and indeed the economy as a whole.

You can invest in funds that track an index, and Moneybox offers a good selection – including ones that track the FTSE 100 index and the S&P 500 index. When you invest in these funds, you’ll be indirectly investing in the different companies that are included in the index.

 

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What is the S&P 500?

The S&P 500 is the largest stock market index in the US. It tracks the 500 biggest US companies, and it’s used as a performance indicator of the US economy as a whole. When the S&P 500 is rising, the US economy looks strong – which usually means it’s more attractive to investors. When it’s falling, the reverse is true.

 

What is an index rebalancing?

From the first section, we know that an index is a grouping of different companies. But, different indices (the plural of index) have different criteria to determine which companies are included in this grouping.

For the S&P 500, the criteria is ‘market capitalisation’ (in technical terms, it’s a ‘free-float market capitalisation weighted index’). This sounds like quite a big thing, but it really just means that the companies included in the S&P 500 have the biggest ‘market capitalisations’ in the US. And a company’s market capitalisation is simply its share price, multiplied by the number of the company’s shares that are currently trading in the market. For example, at the time of writing (29/09/2023), Apple had 15.5 billion shares and a share price of $170, giving it a market capitalisation of $2.67 trillion.

Companies with higher share prices, or with more shares in the market, will therefore have larger market capitalisations – which means they’ll qualify for inclusion in the S&P 500. A ‘rebalancing’ means that certain companies have fallen outside of the criteria to be included in the S&P 500, while other companies have also satisfied the criteria. The S&P 500 is rebalanced quarterly each year, on the third Friday of March, June, September, and December.

 

How was the S&P 500 rebalanced in September 2023?

The S&P rebalancing in September 2023 added two companies: Blackstone and Airbnb. It also removed two companies: Newell Brands and Lincoln National. But, what was also important, is that it adjusted the weightings for a number of companies, including Amazon, Tesla, Apple, and Alphabet (Google).

These are big names – and some of the largest companies not just in the US, but the world. So a shift in their weighting in the S&P 500 will change each of those companies’ influence over the total value of the index. Amazon and Tesla’s weighting was increased, but Apple’s was decreased. This meant that managers of funds that track the S&P 500 index had to rebalance their funds to ensure that they matched the index’s returns.

Luckily, all of this rebalancing is carried out by professionals who are paid to ensure that their funds track the S&P 500 index. This means that for investors there isn’t anything to do, and any S&P 500 funds will still track the market performance of the S&P 500 index. So, even though the funds that track an index can sometimes be called ‘passive’ funds, they are actively monitored to ensure they always reflect the performance of the index that they’re tracking.

Rebalances aren’t necessarily for better or worse, it’s just a slightly different grouping of companies than it was before – and some companies have more or less sway over the performance of the S&P 500 now than they did before the rebalancing took place.

 

Why and how to invest in funds

One of the exciting things to keep in mind when you’re investing in funds, is that you’re investing in hundreds of real companies – names that you’ll probably know like Apple, Amazon, and Tesla. These are real businesses with real plans for the future, and real influence over economic performance.

So when you’re investing in funds you’re not just investing in a single fund at a time, but you’re investing in the future growth of a sector or entire economy over the long term. With the S&P 500, that’s the US economy – which has gone from strength to strength against numerous challenges over hundreds of years.

 

All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest. 

Past performance is not a reliable guide to future gains. 

Tax treatment depends on individual circumstances and is subject to change.