Headlines:
- S&P 500 = Concentrated Positions.
- Diversification = Mirage.
- SPY = Just Another Tech Heavy Equity Index.
Q4 2020 hedge fund letters, conferences and more
Somehow... Lost In The Performance Of The SPY/S&P 500 Index Are The Actual Index Constituents.
There Are 11 Different Sectors Comprising The S&P 500... Suggesting Quite A Bit Of Diversification... Considering There Are 505 Companies Sandwiched Into The 11 Sectors.
However... Simply Peering Beneath The Surface Of The Index Reveals Quite A Bit Of Concentration... As Standard and Poor’s Ranks Companies According To Absolute Equity Capitalization... Which Is Assigned By Investors... And Recalibrated Daily By The Financial Markets.
Consider The Following S&P 500 Data:
- The Top 10 Co’s In The S&P 500 = 27.14% of Index Value.
- The Top 40 Co’s In The S&P 500 = 48.99% of Index Value.
Another Way To View It...
The Daily Price Impact Of The Smallest 460 Companies In The S&P 500 Has The Same Price Impact [in aggregate] As The Largest 40 Companies.
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That’s Not Much Diversification... More Specifically... THAT’S A BOATLOAD OF CONCENTRATION For A 505 Factor Index.
Plus... As Dollars Flow Into The SPY... The Larger Necessarily Get Larger And Vice-Versa... A Self-Reinforcing Feedback Loop... Increasing The Already Elevated Concentration Of Assets.
Moreover…Most Of The Eleven Distinct SPY Sectors Are Quite Actively Traded…Just Like The SPY…But Peeled Out Of The Index For Pure Industry Exposure.
Further…Examine The Top Two Individual Holdings’ Massive Price Impact…On The Following Four S&P 500 Sectors.
XLK = Technology = 27.79% Of S&P 500
AAPL 21.19%
MSFT 20.35%
Combined = 41.54% Sector Price Impact
XLY = Consumer Discretionary = 12.80% Of S&P 500
AMZN 22.06%
TSLA 16.75%
Combined = 38.81% Sector Price Impact
IYZ = Telecom = 11.06% Of S&P 500
T 20.91%
VZ 20.62%
Combined = 41.53% Sector Price Impact
XLE = 2.61% Of S&P 500
XOM 24.43%
CVX 21.01%
Combined = 45.44% Sector Price Impact
The Key Tenet In The Composition Of The S&P 500 Index = Larger Equity Capitalized Companies Receive Proportioned Index Weightings.
So... Is The S&P 500 An Accurate Measure Of Broad Equity Performance?
Actually... It Does Not Even Matter.
What DOES MATTER... However... Is That The S&P 500 Index Is Not As Diversified As It’s “500” Title Implies... NOT EVEN CLOSE.
A More Accurate Title = “THE LOPSIDED MEGA-CAP 40 INDEX”…[Compiled By Herding + Stampeding + Trend Following Investors].
Even More…18 Technology Companies Are Represented In The Top 40…Containing 65% Of The 40’s Equity Value.
So With The S&P 500 Equity Portfolio Lopsided…There Is Significantly More Concentration Risk + Volatility Than Perceived…Especially For The Top 40 Companies In The Index.
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