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Increasing Churn Rate In The S&P 500: What's The Lifespan Of Your Stock?

Nov. 06, 2014 2:27 PM ETIBM, PG, VFIAX, VTSAX24 Comments
Minutemen profile picture


  • The rate at which stocks are removed from the S&P 500 is increasing at an alarming rate.
  • The average lifespan of a company on the S&P 500 has decreased from 90 years in 1935 to 18 years today.
  • At the current churn rate, 75% of S&P 500 companies will be removed from the index by 2027.
  • Long-lived companies such as Procter & Gamble that successfully utilize "creative destruction" reinvent themselves and return value to shareholders.
  • The increased churn rate also has tax consequences for holders of passive index funds.

The S&P 500 index includes 500 large-cap companies that are traded on the American stock exchanges and covers about 80% of the U.S. equity market by capitalization. The S&P 500 is used widely as a barometer for U.S. large-cap equities, and many investors hold S&P 500 mutual funds or ETFs in their investment portfolios. What many investors, including those who hold individual equities, may not be aware of is the amount of turnover or churn within this index and what this may mean for your investments. For example, in 1935 the average lifetime of a large-cap company in the S&P 500 was 90 years. But in a report compiled by Richard Foster of INNOSIGHT, by 1958, that lifetime had declined to 61 years, and then declined further to 25 years by 1980. Today the average lifetime of a company on the S&P 500 is only 18 years (see Figure 1). Over the past decade, 50% of the S&P 500 has been replaced, and at the current rate of replacement, an S&P 500 company is being replaced about once every two weeks. If the trend continues, approximately 75% of companies on the index will be replaced by 2027.

Figure 1: Rolling seven-year average lifespan of companies on the S&P 500 index. Fifty percent of companies have been removed from the list in the past decade, and another 75% are projected to be removed by 2027. Source: INNOSIGHT Executive Briefing

For example, in 2014 alone, 15 companies were removed from the S&P 500 as they were replaced by new entrants to the list. In prior years, 23 companies were removed in 2011 and 18 each were removed in 2012 and 2013. And these are not just smaller companies on the index that you may never have heard of. Rather, companies removed over the years include many iconic American names

This article was written by

Minutemen profile picture
I'm a self-directed Dividend Growth Investor with a focus on total returns. I utilize a barbell approach to portfolio building that emphasizes classic higher yielding, but slower growing blue-chip dividend aristocrats on one end, and faster growing, but lower yielding stocks with high-dividend growth rates on the other end. I look for high-quality companies with strong credit ratings and those that have adequate earnings and free-cash flow to cover their dividend, and have room to continue raising the dividend in the future. I am a buy-and-hold, value investor. With experience, I have noticed that my biggest investing mistakes have not been in buying stocks, but in selling stocks. Some of the biggest gains I've seen are in stocks that I've previously sold! But these mistakes have taught me to have patience and to allow my portfolio and dividend income to grow with the passage of time. I also invest in several high-quality mutual funds, primarily those from Vanguard. No investor can consistently beat the market. But you can generate more annual dividend income than the market.

Analyst’s Disclosure: The author is long PG, VFIAX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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