S&P 500 and double counting

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Question: 

The S&P 500 is a list of the top 500 companies based upon market capitalization. As such it is viewed as a good representation of the whole economy. There are 11 sectors in the S&P, for example Financials which accounts for 13% of the whole list, ranking 3rd after the healthcare and information technology sectors. Berkshire Hathaway (BRK.B = $530 billion market value) is included in the Financials sector. BH also owns a significant amount of stock in most of the financial sector, as well as other sectors. BRK.B is represented on the S&P mainly as an owner, not a producer of products or services. Does including BRK.B in the S&P 500 skew the results of the economic ratings, because, like circular reasoning, it means many of the S&P are represented twice?

Since I am not an economist, I am asking out of curiosity, not criticism and would like to better understand this situation. Thank you for your consideration and any response.

Answer: 

Yes, there is a potential for double counting---in the case of publicly traded companies included in the SP500 that are also held in the Berkshire's portfolio (e.g., Apple or American Express). The extent to which this may skew any ratings or analyses would depend on the diversification of the latter portfolio and Berkshire's own weight in the SP500 index. That said, Berkshire Hathaway also owns many privately held companies (i.e., companies that don't issue publicly traded shares). Thus, including it in the SP500 perhaps helps make the index more representative of the "health" of the economy overall.

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Associate Professor
Last updated on May 27, 2019