The S&P 500^® Market Leaders Index is designed to track companies within the S&P 500 that hold significant market share and sustainable competitive advantages. Unlike the broader S&P 500, this index zeroes in on companies that consistently outperform their peers in terms of return on invested capital (ROIC), free cash flow (FCF) generation and substantial market presence. In this blog, we will delve into how this index is constructed, examine its back-tested performance and highlight its unique characteristics.

Methodology Overview

The S&P 500 Market Leaders Index selects companies using a Market Leader Score based on the average of three key metrics.

1. High Market Share: This metric may indicate competitive advantages like economies of scale, network effects or strong brand power. Companies with high market share often have better pricing power and higher returns.
2. Sustained High ROIC: Calculated as the five-year average of net income divided by total equity plus total debt, this metric assesses profitability and reflects a company’s efficiency in capital utilization. Market leaders often exhibit stronger ROIC due to their dominant market positions.
3. Consistent High FCF Margin: Companies that maintain consistently high FCF margins over five years, combined with high ROIC, tend to be able to effectively redeploy cash flow, helping them maintain market share.

The top 50 companies ranked by Market Leader Score are included in the index and are weighted by float-adjusted market capitalization (FMC).

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Historical Performance Characteristics

The S&P 500 Market Leaders Index has demonstrated impressive long-term performance compared to the benchmark. As shown in the back-tested period covered in Exhibit 2, it has outperformed with lower volatility, leading to better risk-adjusted returns. The index not only offered greater upside potential but also a defensive stance. Notably, during the recent tariff-related drawdowns, the S&P 500 Market Leaders Index outperformed the benchmark by 2.23%

Historical Drawdowns

The S&P 500 Market Leaders Index has often benefited from downside protection during past market sell-offs.

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Higher Quality Constituents

Historical fundamental analysis of the index reveals a greater focus on profitability metrics that align closely with the quality factor.

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Sector weights have been diversified and historically skewed toward Consumer Staples, Health Care and Information Technology compared to the benchmark, with underweights in Energy and Industrials. As of Dec. 31, 2024, the index showed overweights in Consumer Staples, Financials and Information Technology, while Health Care was underweight.

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Historical Macroeconomic Performance

The S&P 500 Market Leaders Index tended to outperform the benchmark in most market environments but had the highest performance in periods of falling growth, regardless of inflation.

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Conclusion

The S&P 500 Market Leaders Index tracks 50 of the most consistently high-performing companies in the U.S. equity market. By focusing on ROIC, FCF margin and market share, the index seeks to identify market leaders with sustainable competitive advantages. Historically, this approach has identified higher-quality companies that exhibited defensive qualities and strong risk-adjusted performance.

¹ For more information please see the full methodology.

² Further explanation of the macroeconomic analysis is available in the blog A Historical Perspective on Factor Index Performance across Macroeconomic Cycles.

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