Module 10 · Investing
Indices, the S&P 500 and active versus passive
What a stock index measures, how the S&P 500 and the MSCI World are built, why concentration matters, and what the evidence says about funds that try to beat an index.
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In this lesson
- Explain what an index is and compare market-cap, price and equal weighting
- Describe the S&P 500, including its concentration and its bad stretches
- Tell the S&P 500, MSCI World and MSCI ACWI apart, and price indices from total-return indices
- Interpret the evidence on active versus passive funds, including its caveats
Amira, 35, hears on the radio that “the S&P 500 fell 2% today”. She wonders: 2% of what? And can she buy “the S&P 500”?
An index is a scoreboard
An is a number that tracks the combined value of a defined group of investments. If a share index rises 10%, the group rose about 10%. You cannot buy an index itself, but you can buy an , a fund that copies an index instead of choosing holdings.
How the companies are weighted decides how the index moves:
- Market-cap weighting. Bigger companies count more. The S&P 500 and MSCI indices work this way.
- Price weighting. Higher share prices count more, whatever the company’s size. The Dow Jones and the Nikkei 225 work this way.
- Equal weighting. Every company counts the same.
The S&P 500 up close
The tracks about 500 large US companies (504 lines in June 2026, because some firms have two share classes). It is not a list of the 500 biggest: a committee applies published rules, including US domicile, sufficient size and trading volume, and positive profits. It is weighted by the value of shares available to trade.
- Concentration. On 30 June 2026 the top ten holdings were about 36% of the index, and information technology about 38%. It is spread over many companies, but tilted towards a few firms, one sector and one country.
- Long-run return. With dividends reinvested, the index earned about 10% a year from 1928 to 2025, before inflation.
- Bad stretches. It fell 43.8% in 1931, 36.6% in 2008 and 18.0% in 2022. From 2000 to 2009 it earned about −1% a year.
Other indices
The index has 1,249 large and mid-size companies in 23 developed countries, with the US about 73% of it (September 2026). It contains no emerging markets. MSCI ACWI adds 24 emerging markets (2,414 companies, US 64%). National indices include the DAX (Germany, 40 companies), CAC 40 (France), FTSE 100 (UK), Nikkei 225 (Japan) and SBITOP (Slovenia).
Most headline indices are price indices, which ignore dividends. The DAX is a total-return index that reinvests them, so comparing it with a price index overstates its performance.
Active against passive
means a manager picks holdings to try to beat an index. means copying the index at low cost. The S&P’s SPIVA reports compare them, counting funds that closed, which would otherwise flatter the results (survivorship bias).
- In 2025, 79% of US large-cap active funds did worse than the S&P 500.
- Over 20 years, more than 90% did.
Underperforming is not losing money, and a minority of funds do beat the index, but few repeat it. The arithmetic helps explain why: before costs, the average active fund earns the market return, so after costs it must earn less.
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