by Joseph Pecoraro
Investors and the media look to the S&P 500 index to benchmark portfolio stock performance. Many investors believe that by purchasing the index they have a diversified equity portfolio. This couldn’t be further from the truth.
The S&P 500 index is a top-heavy index that is weighted towards large cap, or mega cap stocks. What that means is the larger the company is in size, the more pull or push influence they have on the performance of the index. We look at the S&P 500 by using the SPDR S&P 500 ETF (ticker: SPY) to provide some insights. The total return for SPY in 2019 was 31.32%. Total return is a combination of price appreciation of the ETF and dividend income. At the end of 2019 the yield on SPY was roughly 1.75%. That means that approximately 29.50% of the return was from price appreciation.
If we dive deeper into the numbers, we see that almost one third, ~9.05%, of SPY’s 2019 return is from the “Information Technology Sector (Info Tech)” and that sector makes up over 21% of the entire S&P 500.
Apple and Microsoft are the largest weightings in the Info Tech sector. Combined they contributed to almost half of the return of the entire sector. Here is the shocking part, both of them were not even in the top 5 of the best performers in the sector. The top five performers only contributed .42% of positive performance on the S&P 500 total return.
Source: ACM / SPDR S&P 500 ETF (ticker: SPY) 2019 Returns
Let’s pull other securities and provide some context around them
You may sense a theme with the securities selected.
Amazon is a 3% weighting in the S&P 500 and contributed .61% of positive performance. The top 20 best performers in Amazon’s sector (Consumer Discretionary) contributed almost the same performance, .74%, of the S&P 500’s return with a weighting of only 1.67% of the S&P 500 combined.
In the Communication Services sector, Facebook was the 2nd best performer. Alphabet (Google) share classes C and A were 10th and 12th respectively in performance and Netflix was 15th. These 4 stocks make up over 5% of the S&P 500 and over half of their sector’s weighting.
Facebook, Amazon, Netflix, Alphabet (Google), Apple and Microsoft make up 16.18% of the S&P 500’s value and contributed 6.52% of positive return in 2019. This means that six stocks accounted for more than 20% of the S&P 500’s 2019 annual return, while the other 494 stocks account for the rest.
When you buy an S&P 500 index mutual fund or ETF, you may believe you are diversifying but you are really buying a large allocation into the above-mentioned handful of stocks. These companies drive a disproportionate percentage of the S&P 500’s performance. This might be fine for an aggressive equity investor but for most this would be considered inappropriate risk.
If you have a portfolio of mutual funds or ETFs, you may want to take a moment to consider, “What do I really own?” And if you’re interested in learning what you own, we would be happy to provide complimentary review of your portfolio.