Top 40 Companies In S&P 500 = Lopsided Price Impact = 48.99%

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Top 40 Companies In S&P 500 = Lopsided Price Impact = 48.99%
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Headlines:

  1. S&P 500 = Concentrated Positions.
  2. Diversification = Mirage.
  3. SPY = Just Another Tech Heavy Equity Index.

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Somehow... Lost In The Performance Of The SPY/S&P 500 Index Are The Actual Index Constituents.

Consistency is what makes the top 50 best-performing hedge funds so strong

Every month and quarter, multiple reports on average hedge fund returns are released from several sources. However, it can be difficult to sift through the many returns to uncover the most consistent hedge funds. The good news is that Eric Uhlfelder recently released his "2022 Survey of the Top 50 Hedge Funds," which ranks the Read More

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:

  1. The Top 10 Co’s In The S&P 500 = 27.14% of Index Value.
  2. 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.

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.


Contact The Author: Dominate@GlobalSlant.com

Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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