S&P 500 Longevity and ETFs

Question

According to this forecast S&P 500 companies longevity (the time they exist in the index) will reduce from 24 years to just 12 by 2030 mostly due to tech disruptions. For an S&P 500 ETF investor, does this mean bad/good news or this doesn't affect returns at all?

Answer 1

Well it's certainly nothing new. If you look at the chart on that page, longevity is actually higher now that it was in all of the 2000s. They are just predicting that turnover will increase over the next 10 years, though I haven't read the paper in detail to understand why they predict that.

I would also posit that turnover is a result of market performance, not a driver of it. If the market underperforms, some of the S&P is going to underperform and get removed, while some companies will survive (or even outperform) and enter the index.

Answer 2

My first thought is, "so what?" You want to be in a cap weighted index of roughly the largest 500 companies in the US public markets, you got it. So companies are entering and falling out of the index a bit more frequently, so what?

But then you have to question some data. Taking a brief skim of your link you get bullet point 1:

The 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027 (Chart 1).

Ok. Then you look at Chart 1 and:

Chart 1: Average Company Lifespan on S&P 500 Index, Years, rolling 7-year average

Why 7 years? Why not just average? What constitutes tenure? If the 450th largest company is acquired by the 40th largest company does that end the tenure of the 450th? Does this just encompass companies shrinking to the point of being replaced by a company that grew in to the top 500? And either way, so what? The goal is to be invested in the 500 largest companies, that's what you got. Does this mean something to market volatility? Maybe, but the passive index investor doesn't concern themselves with the nuts and bolts of the markets.

Maybe an index of the largest 250 companies would have less turnover? Would that be better?

But ALWAYS question data that uses weird or arbitrary boundaries. Why not use 5-year rolling average, why not 10?

Answer 3

Short answer: S&P 500 Index ETF returns will not be affected in the long run.

Here are the reasons:

1. S&P 500 index is balanced and spread across different industries, thus it is impossible for all the industries to perform badly the same time.
2. There are 500 companies inside the index, that means individual company stock only weight 1/500 or 0.2% of the whole index.
3. If all the S&P 500 index stocks perform badly, that will mean all the industries is perform badly, so it will not affect the index position.
4. Those inside S&P 500 are selected according to capital and various factor. And a company with huge capital usually will not be wiped out overnight. Even during a panic sells, there are value buyer able to salvage the remaining asset value to support it.
5. Due to the above reason, S&P 500 index ETF can always take time to track and balance the stock, i.e. sell-off those stock drop out of S&P 500 index, buy the newcomer.
6. the S&P 500 index ETF tracking practice will cause matthew effect to involved stock(the loser stock will fall further, the newly entry stock will go higher). Since each company only weight 0.2%, it hardly dents the ETF coffer.