Comparing the BSE Sensex to Other Major indices

In this article, we will discuss

• What is BSE Sensex?
• What Is the S&P 500 Index?
• What is FTSE 100?
• Sensex vs S&P500 VS FTSE100
• How to invest in Foreign Stocks?

Indian stock exchanges like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) list over 5,500+ companies. Despite that, there is growing attraction among Indian investors towards foreign stocks, be it Apple, Google, or Netflix. This is because these are some of the largest companies in the world, in their respective sectors. Today, we have the opportunity to invest in these global giants. But before planning to invest in these foreign stocks let us take a look at the performance of Sensex vis-a-vis S&P 500 and FTSE 100.

What is BSE Sensex?

The word Sensex is derived from two words ‘Sensitive’ and ‘Index’. There are around 6,000+ listed companies on the BSE. It would be nearly impossible to track the performance of each of these companies, as discussed earlier. Therefore, Sensex was constituted to represent large-cap, financially sound companies from various key sectors that are listed on BSE. Sensex is the oldest stock index in India. It first came into being in 1986. Standard & Poor’s (S&P) operates the S&P BSE Sensex. Sensex consists of 30 companies. These companies are selected based on the free float market capitalization methodology. Only those companies are listed on Sensex, whose Free Float Market Capital is the highest. The larger the market cap of the company, the bigger its weight is in the index. The financial services sector like Banks or NBFCs holds the highest weightage in Sensex followed by IT companies. The fluctuation of Sensex depends on how these companies are doing on a given day. However, the companies within the indices are subject to change over time to reflect the current market situation. In other words, non-performing stocks are removed from the Index and replaced with high performers. If a company undergoes any major corporate actions such as spinoffs, mergers, and acquisitions, compulsory delisting etc then too they are removed from the list. THE S&P BSE index Committee takes decisions on which companies are added or deleted from the index bi-annually in June and December.

Criteria to be included in Sensex:

Companies need to meet the below 5 criteria to be a part of the Sensex

• The company must be listed on BSE for at least three months
• Must be a large or mid-cap company
• The stock should be highly liquid meaning easy to buy and sell
• Company to have reported a substantial part of its revenue from its core business operations
• Sector weightage of the company

The formula for Index calculation is – (total free-float market capitalization/ Base market capitalization) * Base index value. Before we look at Free Float Market Capitalization we must understand what is market capitalization. The market capitalization of a company is the total value of all of a company's shares of stock. It is calculated by multiplying the price of 1 share by the total number of outstanding shares in the market. For example, a company with 1,000 outstanding shares priced at Rs 10 each would have a market cap of Rs 10,000. However, for a company to be included in the indices we need to calculate its free float market cap which is nothing but the number of shares left after we subtract the shares which are held by the owners of the company. It is the number of a company’s outstanding shares open to trade publicly. So taking the above example, if the company has 1,000 shares but 600 are with the owners then the free float market cap will be 4,000 (400 shares multiplied by Rs 10). The base year for Sensex is 1979 and the base value is 100. The current value is with reference to the base value.

What Is the S&P 500 Index?

The Standard & Poor's 500 Index 500 was formally launched in 1957. It is an index of 500 publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent US equities and the overall US stock market performance and the economy. This index is widely considered a standard benchmark for large-cap equities. Since its inception, the index has generated a compound annual growth rate (CAGR) of roughly 10.67%, including dividends.

S&P Index Criteria: Eligibility Requirements

To be eligible for inclusion in the S&P 500 index, the following criteria must be met:

• Minimum Market Capitalization should be USD 8.2 Billion
• Company to be based in the U.S. with Common Stock in Capitalization
• Listed on an eligible U.S. Exchange like e.g. NYSE, NASDAQ
• The earnings in most recent quarter should be positive. Earnings should also be positive for the Trailing Twelve Months (TTM) basis – i.e. the sum of the most recent historical four quarters

The list of companies in the S&P 500 are reviewed and updated on a quarterly basis.

How is the S&P500 calculated?

The S&P 500 uses a market cap weighting method, which gives a higher percentage allocation to companies with the largest market capitalizations. The weighting of each company is calculated by taking the company's market cap and dividing it by the total market cap of the index.

Company Weighting = Company’s market cap/​ Total of all market caps

The information technology (IT) sector is the most significant contributor to the S&P 500 index with a contribution of 2.3%

What is FTSE 100?

FTSE is short for ‘Financial Times Stock Exchange’, which is derived from – ‘Financial Times’ and ‘London Stock Exchange’, the two companies that launched FTSE. The ‘100’ in ‘FTSE 100’ represents the number of stocks in the index. The FTSE 100 is an index made up of shares from 100 top companies by market capitalisation on the London Stock Exchange (LSE). The price of the index is determined by the price movement of these constituent stocks. Criteria to be included on the FTSE 100 include:

• The company must be listed on the LSE,
• It must be denominated in pounds,
• It must meet minimum float and stock liquidity requirements.

How is the FTSE 100 calculated? The FTSE 100 is calculated by weighing all stocks listed on the LSE by market capitalisation. The 100 companies with the highest market capitalisation become part of the index. Stocks with higher market capitalisation have more weight in the FTSE 100. The market capitalisation of each company is reviewed once in a quarter, and the index is adjusted accordingly.

Sensex vs S&P500 VS FTSE100

Indices like the Sensex for India, FTSE 100 for the UK or S&P 500 for America contain very different companies, trade on very different valuations and will likely give different returns historically and going forwards.

• Concentration:

Firstly, the S&P 500 is significantly less concentrated than the Sensex or FTSE 100. As the name implies, the S&P 500 tracks a lot more companies than both Sensex and FTSE 100 combine. Thus it is a more diversified stock exchange. The S&P 500 contains, not 500 as the name suggest but 505 stocks and the FTSE 100 contains 101 stocks. This is because some companies, such as Royal Dutch Shell and Alphabet, have several classes of shares. On the other hand, Sensex contains just 30 stocks. The top ten stocks make up 65% of Sensex and 42% of the FTSE 100. By contrast, the top ten make up just 27% of the S&P 500.

• Size:

The market cap of BSE Sensex is $ 3.5 trillion. FTSE 100 has a market cap of £1.6 trillion GBP. These two markets dwarfs in comparison to the S&P 500 which is worth a whopping $25.6 trillion. Therefore, the US market is more than 10 times bigger than its Indian counterpart and 12 times compared to FTSE100. Microsoft, the largest member of the S&P 500, has a market cap of about £1.3 trillion. So one American company is worth almost as much as the entire Sensex and FTSE 100.

• Exposure:

The Indian Sensex and FTSE100 has primarily domestic companies listed on its exchanges, while the S&P500 is home to some of the largest global companies. Top US companies as well as major corporations from China, London, and other top countries can be found in S&P500.

• Stock quality:

The S&P 500 has riskier technology stocks, while the FTSE 100 has more cyclical stocks and Sensex has financials (41%). The S&P 500 is made up of a lot of technology stocks—74, to be exact. Meanwhile, just 7 stocks on the FTSE 100 are technology stocks and 4 on Sensex (software).

Top stocks in the S&P 500 and FTSE 100

S&P 500

• Apple
• Microsoft
• Amazon
• Facebook inc A
• Alphabet Inc A (Google)
• Twitter
• Johnson & Johnson
• Berkshire Hathaway
• Visa
• Procter & Gamble

FTSE 100

• AstraZeneca
• Unilever
• HSBC Holdings
• Diageo
• GlaxoSmithKline
• British American Tobacco
• BP
• Royal Dutch Shell A
• Rio Tinto
• Reckitt Benckiser

Sensex

• Reliance
• TCS
• HDFC Bank
• ICICI Bank
• HUL
• Infosys
• ITC
• SBI
• HDFC

Historical returns:

The average stock market returns over the last 10 years

	10 year CAGR
Sensex	12%
S&P 500	14.7%
FTSE 100	12.8%

US equities (S&P500) have given staggering returns of 14.7% CAGR in the last 10 year period, which is higher when compared with the BSE Sensex and FTSE100. Table of total yearly returns

Year	Sensex	S&P 500	FTSE 100
2014	19%	11.4%	-3%
2015	25%	-0.7%	-5%
2016	-9%	9.5%	14%
2017	17%	19.4%	8%
2018	11%	-6.2%	-12%
2019	17%	28.8%	12%
2020	-24%	16.6%	-14%
2021	68%	26.9%	14%
2022	18%	-19.4%	1%
2023	1%	7.8%

How to invest in Foreign Stocks?

Investing in S&P500 or FTSE100 or any other indices of other countries will help investors to have a diverse portfolio that gives them exposure to a range of different assets. There are three ways using which you can invest in foreign stocks 1) Funds of funds (FoF) mutual funds - These funds are invested into foreign stocks and give a certain balance for the investors when the domestic market is falling. 2) Direct Investment – For those who do not wish to invest via fund houses, they can us the Liberalized Remittance Scheme (LRS) to invest directly. This LRS scheme allows Indian citizens to invest directly in the stock exchanges of foreign countries without having to ask for any permission. However, there is a certain limit on the investment amount per year. As per LRS, you can invest up to $250,000 per year. For this, the investor will need to open a trading account with an international broker with brokerage firms located in the US and deal with the US stock exchange. 3) Exchange-traded funds – Investors can invest in ETFs both through local brokerages as well as international brokers. However, these funds need to be registered by SEBI (Security Exchange Board of India). The ETFs can be traded at any time of the day.

Conclusion

To summarise, one can see that the Sensex performance is reasonably good compared to the S&P 500 and the FTSE100. However, as compared to the Sensex, the S&P 500 is relatively less volatile and has experienced much lower drawdowns during crisis. The recovery post a market fall has been much faster in the US stocks than in the Indian Markets. One of the major advantages of investing in US or UK markets is the appreciation in US Dollar and Euro. As it appreciates in value, so do your investments, even if your portfolio itself is unchanged. The foreign market allows global exposure and enables investors to grow with the biggest companies in the world, such as Google, Amazon, Facebook, etc. However, whatever market one invests in, being aware of the pros and cons and the risk-return trade-offs is a must. To start your investment journey open a free demat account with Samco.