Active Index

Chances are, you’ve heard or read that index funds are passive—meaning unmanaged, meaning there isn’t a team of experts who are poring over earnings reports and making decisions on which stock to include in the portfolio and which to exclude.

But that’s not entirely true.  Take the S&P 500 index, for example.

Contrary to its name, the S&P 500 index actually, at this moment, includes 504 different stocks, some of them names you recognize (Nvidia, Microsoft, Apple, Amazon, Tesla, Berkshire Hathaway and JPMorgan Chase).  Others, like Air Products, Signet Jewelers and Baxalta, are a bit more under the radar.  

And it is not nearly passive as most investors believe it is.  In calendar 2025, so far, the 500 index has added 15 new stocks and removed 15 others.  In October, the index dropped Carmax, and on November 4, Eastman Chemical Co. was removed from the list.  Earlier, a company called Emcor replaced Emphases Energy, Robinhood Markets replaced Caesar’s Entertainment and AppLovin moved in and MarketAxess moved out. 

The index made 18 changes in 2024, and 17 in 2023.  (Uber and Airbnb joined that year, replacing Sealed Air and Newell Brands,)

If you’re looking for a truly passive index, then consider the Total Stock Market Index, which currently holds 3,529 different stocks—including, of course, all the stocks in the S&P 500 and any of them the S&P 500 committee might have dropped.  The only reason there’s a change is if a company goes out of business or a new company goes public.

Is one better than the other?  The ‘active managers’ of the S&P 500 have delivered a 15.26% average annual rate of return over the last ten years, compared with 14.66% for the Total Stock Market Index.  So they must be doing something right.

But it’s helpful to remember that the last ten years has seen the emergence, growth and outperformance of a handful of tech stocks that now make up a large percentage of the S&P 500.  How large?  Just ten stocks in the S&P 500 now make up 40.2% of its total market value.   In fact, the two most valuable companies by market cap—Nvidia and Microsoft—have a combined value roughly equal to all of the 3,000+ companies that are not in the S&P 500.

That means, if the winds turn against large tech companies and megacap firms in a future market downturn, the Total Stock Market Index might be better positioned to weather the storm.  Or, sensing the shift in winds, the committee that reconstitutes the S&P 500 every year might make a few more adjustments in an effort to maintain their advantage.  

Sources:

• ‍https://finance.yahoo.com/news/16-difference-could-vanguard-total-110900640.html
• ‍https://en.wikipedia.org/wiki/List_of_S%26P_500_companies
• ‍https://investor.vanguard.com/tools-calculators/etf-fund-comparison-tool?Ticker=vtsax,vfiax