New York (CNN Business) The S&P 500 is supposed to be a broad representation of the US economy. So if you’re plowing money into an index fund, you might think you’re doing a good job of diversifying your assets.
You’d be wrong. These days, it’s basically the S&P 5.
The five largest companies in the S&P 500 – all tech companies – account for nearly 20% of the market value of the entire index., Google ownerandare collectively worth $4.85 trillion. Thehas a market value of around $26.7 trillion.
The last time the S&P 500 had such a high weighting in a single sector (tech) was right before the dot com bubble burst in 2000, according to Tocqueville Asset Management portfolio manager John Petrides.
“Diversifying your assets is Investing 101. Spreading investments across various asset classes, stocks, regions, credit, investment type, is the one way investors can compensate for not having a crystal ball to predict the future,” Petrides said in a report
Petrides is especially concerned that the two largest companies in the index – Apple and Microsoft – each have a higher weighting in the S&P 500 than some industries.
Apple and Microsoft each make up about 4.5% of the S&P 500’s market value. That’s higher than the weightings for the energy, utilities, real estate and basic materials sectors.
“Buying the S&P 500 Index fund today is like buying a used car without opening up the hood and taking it for a ride….do you really know what you are buying?” Petrides said.
Petrides pointed out that in addition to the high weighting for tech in 2000, financial stocks were a disproportionately large part of the index in 2007 just before the demise of Lehman Brothers and the Great Recession. Energy stocks also had an unusually high concentration in 2008 before oil prices plunged.
Investors who still want texposure to the broader market can look for other funds and ETFs that own the S&P 500 companies – with a twist.
Other index ETF funds lag the S&P 500
S&P 500 Equal Weight ETF RSP Money management giant Invesco, for example, has a. As the name implies, the fund takes all the stocks in the index and weights them equally.
Unfortunately, both funds have lagged the performance of the S&P 500 Index over the past few years. While weighting stocks equally in a portfolio might make some inherent sense, it’s hard to outperform the broader market when one sector is outpacing all the others.
L Brands LB Gap GPS Nordstrom JWN Macy’s M The strategy of putting more money into smaller S&P 500 companies seems fundamentally flawed. The Reverse Cap ETF currently has top weightings in struggling retailersand. The reason they have smaller market values? Their stocks have all plunged over the past year.
“Having this much in tech is a concern that shouldn’t be ignored. There are comparisons to the late 1990s. But we need to realize that these companies are achieving better-than-average revenue and earnings growth in a growth-starved world,” said Timothy Chubb, chief investment officer at Girard.