The S&P 500 is arguably the most commonly used index today. It is certainly a step up from the Dow Jones.
That’s because the Dow is comprised of just 30 companies. These 30 companies are hand-selected to generally correspond to the performance of the U.S. economy. The Dow is also price weighted rather than market-cap weighted. This means that the share price of the 30 securities determines their weight, rather than the actual market cap of the constituents.
The S&P 500 is certainly a step up as far as tracking the overall U.S. stock market relative to the Dow. The S&P 500 selects its constituents by committee (similar to the Dow). The committee looks specifically for companies with market caps in excess of $6 billion, with high trading volume, and that help the index to maintain appropriate sector weighting relative to the U.S. economy, among other factors. As the name suggests, there are currently just over 500 constituents in the S&P 500.
Enter the Wilshire 5000
The Dow covers 30 stocks. The S&P 500 covers just over 500. The Wilshire 5000 covers 3,486 stocks; almost seven times the coverage of the S&P 500.
The Wilshire 5000 includes all U.S. stocks with readily available pricing. Thinly traded stocks are excluded because pricing data is not very accurate for thinly traded securities.
This goes far beyond the reach of the S&P 500 which does not cover stocks with market caps under around $6 billion. There are far more companies with market caps under $6 billion than there are companies with market caps in excess of $6 billion.
There are three versions of the Wilshire 5000 Index:
- Full market-cap weighting.
- Float adjusted market cap weighting.
- Equally weighted.
In both the full market cap and float adjusted market cap weighting schemes, constituents are weighted by their size. In the equally weighted version, each constituent is given an equal weight.
The difference between "full market cap" weighting and "float adjusted market cap" weighting is how market cap is calculated. Float-adjusted market cap is calculated as the total number of shares outstanding not controlled by members of the company multiplied by the share price. Conversely, full market cap is simply the total number of shares multiplied by the share price.
The full market cap weighting of the Wilshire 5000 is used to measure dollar amount changes in the entire U.S. stock market. The float-adjusted market cap is typically a better measure of actual performance. Equally weighted index returns have a strong bias toward small caps.
Wilshire 5000: A better index?
On paper, the Wilshire 5000 is an objectively better index than the S&P 500 (and the Dow 30). That’s because it covers a much greater percentage of the U.S. market. A market cap weighted index of about 3,500 securities is going to be more robust than a market cap weighted index of around 500 securities.
While the Wilshire 5000 index is superior to the S&P 500 and Dow, it is not nearly as possible. If you tell the average individual investor you are indexing your performance against the Wilshire 5000 instead of the S&P 500, they will likely wonder why. Then additional explanation is required.
For better or worse, the industry standard is the S&P 500. The Wilshire 5000 was created in 1974. It is unlikely it will suddenly see a massive uptick in popularity 44 years after its creation. The S&P 500 will very likely always remain the "index of choice" for stock market performance comparisons and as a general gauge of market performance.
Disclosure: I am not long any of the ETFs of indices mentioned in this article.
