The myth of market concentration

The myth of market concentration

Recently, there have been a number of articles discussing concentration of the S&P 500 Stock Index. Particular focus has been on the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (Alphabet) – as well as the Technology sector. Some of the articles outline parallels with the tech bubble of 2000. A natural question is whether or not some action should be taken to adjust portfolios. To answer this question, we evaluate the composition and performance of the S&P 500.

In aggregate, the FAANG stocks represent more than $2 trillion of market cap while the S&P 500’s Technology sector represents more than $4.5 trillion of market cap. Both are significant in size on an absolute and relative basis. By comparison, U.S. small cap stocks (Russell 2000 Stock Index) and emerging market stocks (MSCI Emerging Markets Index) have markets caps of $1.9 trillion and $4.7 trillion, respectively (as of June 30,2017)

Historically, the S&P 500’s top 10 holdings typically represent about 20% of the index (see Table 1). Currently, the top 10 holdings represent 18.7% of the index’s market cap, which is relatively unchanged over the past seven years and less concentrated than the index in 2000 and 2005.
The constituents of the top 10 holdings, however, have changed materially in the past 15 years. Apple, Amazon, Facebook, Berkshire Hathaway, Alphabet and JP Morgan Chase are all new to the top 10 listing.

The S&P 500’s top three sectors by weight typically represent about 50% of the index (see Table 2 on next page). Technology and Financials are the two largest index sectors, followed closely by Healthcare. While the Technology sector’s allocation has grown to 22%, it is much lower than the peak of about 33% during the bubble.

The Technology sector’s allocation (about 20% of the S&P 500) closely tracks the operating earnings contribution of the Technology sector, which according to Standard and Poor’s, is between 20% and 25%. This suggests the current technology allocation is reflective of the growing influence and consumption of technology in our economy.

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Inquiries or comments concerning this article may be addressed to:
Susan McDermott, CFA
Chief Investment Officer, Institutional Advisory
Pavilion Advisory Group Inc.

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