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The Standard & Poor’s 500 Index is the most commonly used benchmark for determining the state of the overall economy. Many investors also use the S&P 500 as a benchmark for their individual portfolios.

The Dow Jones Industrial Average used to be the main gauge of economic health for the United States, but that index only contains 30 companies and is limited in the sectors it represents. The S&P 500 has become the leading stock index due to its broader scope. Many hedge funds compare their annual performance to the S&P 500 — seeking to realize alpha in excess of the index’s returns.

Advantages of Using the S&P 500 as a Benchmark

The central advantage of using the S&P 500 as a benchmark is the wide market breadth of the large-cap companies included in the index. The index can provide a broad view on the economic health of the United States.

In addition to its broad scope, another advantage of the S&P 500 is that components of the index are updated on a quarterly basis. A committee determines which companies to include in the index. The factors considered include a market…