S&P 500 is not diverse

[davebarnes]

"Dave Rosenberg had an interesting set of observations in today's Breakfast with Dave. https://www.rosenbergresearch.com

The five largest stocks (Apple, Alphabet, Facebook, Microsoft and Amazon) now comprise nearly one-fifth of the entire S&P 500 market cap.
This is the highest concentration since the dotcom bubble peak of 2000."

Danger, Will Robinson ?

What are decent index alternatives to the S&P 500?

 

[Gumby]

Vimax ?

 

[DrBrisket]

Instead of cap-weighted, perhaps consider SP500 equal weighted index? An available ETF trades under symbol RSP.

 

[Chuckanut]

You have a good point. Alas, the really, really Big Boys and Girls can dominate a number of smaller companies.

I am reminded of this joke: Six blue collar working guys are sitting at a bar drinking beer. The group's average net worth is $60,000. Bill Gates wanders in and joins them. The group's average net worth is now $6,000,000,000.

Sometimes size counts.

 

[OldShooter]

I want nothing to do with sector indexes like the S&P. We own only total market indexes, primarily VTWAX.

That said, the S&P is hard to avoid as IIRC it is about 80% of the US market cap and about 45% of the world market cap. There are some funds that are "total market except S&P" that might be used I'd guess but we have not done that.

 

[karen1972]

Just to put that in perspective I found an article from Jan 2019 that stated the top 10 holdings were 20% of the SP500, so the big 5 pushed the next 5 out.

My allocation is totally wonky so I have no advice on picks that I think anyone else should follow.

 

[Tiger8693]

I remember seeing something in a post here that Total Market and SP500 were basically within .1% of each other long term.

 

[Qs Laptop]

I want nothing to do with sector indexes like the S&P. We own only total market indexes, primarily VTWAX.

You're calling an index fund with 500 components a "sector" fund?

That said, the S&P is hard to avoid as IIRC it is about 80% of the US market cap and about 45% of the world market cap. There are some funds that are "total market except S&P" that might be used I'd guess but we have not done that.

No kidding.

 

[OldShooter]

You're calling an index fund with 500 components a "sector" fund? ...

Sure. It's 100% large cap US stocks.

 

[foxfirev5]

You have a good point. Alas, the really, really Big Boys and Girls can dominate a number of smaller companies.

I am reminded of this joke: Six blue collar working guys are sitting at a bar drinking beer. The group's average net worth is $60,000. Bill Gates wanders in and joins them. The group's average net worth is now $6,000,000,000.

Sometimes size counts.

Yeah but they're still only worth 60k without Gates. Or whatever each of them is individually worth. What Bill Gates is worth has nothing to do with me.

In other words, he's made his money. I still have to make a decision regarding the future.

 

[bobandsherry]

I guess looked at another way, as those top companies go the rest of the economy and companies will too. Those are large enough to move the needle of any set of funds regardless if they are directly included or not

 

[bobandsherry]

Yeah but they're still only worth 60k without Gates. Or whatever each of them is individually worth. What Bill Gates is worth has nothing to do with me.

In other words, he's made his money. I still have to make a decision regarding the future.

But in case of the real economy those big companies will have an impact on smaller. Either for goods, services, lending, support services, trickle down economics, etc . So if "Bill" fails those other 5 will feel the pinch as well.

 

[pb4uski]

....There are some funds that are "total market except S&P" that might be used I'd guess but we have not done that.

Vanguard's is the Extended Market Index Fund. We own some to balance out some VFIAX that we own. ~75% VFIAX + 25% VEXAX ~ VTSAX as I recall.

 

[target2019]

You're calling an index fund with 500 components a "sector" fund?

I recall a similar comment being made in another thread. The bottom line may have been than there are sectors within a market index fund like S&P 500, but to a great extent those who write about investing do not call the S&P 500 a sector.

I call the S&P 500 a category, but that may be incorrect too.

 

[BeachOrCity]

I want nothing to do with sector indexes like the S&P. We own only total market indexes, primarily VTWAX.

That said, the S&P is hard to avoid as IIRC it is about 80% of the US market cap and about 45% of the world market cap. There are some funds that are "total market except S&P" that might be used I'd guess but we have not done that.

Personally i have felt for years that the s&p 500 companies market caps are partially dependent on being part of the index due to the automatic order flow from index investors.

Whether to ride that bus and enjoy the profits or avoid that bus because it may crash at some point is debatable.

 

[DrRoy]

Instead of cap-weighted, perhaps consider SP500 equal weighted index? An available ETF trades under symbol RSP.

+1. And VTI is the Vanguard Total (US) Market ETF.

 

[BoodaGazelle]

Without taking a position on whether or not it is a good thing, the reason those 5 companies are so big is that investors vote with their money based on many factors. It may be that Amazon is overpriced, but the scale of what they are doing seems almost unprecedented. My AA is 50-50, and I have both Fidelity’s S&P and the full market index.

 

[Running_Man]

In claiming the S&P500 is not diverse, is there any part of the business economy that these 500 companies do not cover/ and or are not the primary competition for any business. Before everyone agrees the S&P500 is just a sector, please identify the sectors they do not cover, and being more successful than any other business does not make you a sector, that is only a matter of size. It's like saying I don't want to own large Amazon I'd rather own mom and pop specialty stores, when Amazon has all the Mom & Pop specialty stores on their website, earning commissions from their sales and making better use of their data than they could ever hope to do on their own.

 

[audreyh1]

"Dave Rosenberg had an interesting set of observations in today's Breakfast with Dave. https://www.rosenbergresearch.com

The five largest stocks (Apple, Alphabet, Facebook, Microsoft and Amazon) now comprise nearly one-fifth of the entire S&P 500 market cap.
This is the highest concentration since the dotcom bubble peak of 2000."

Danger, Will Robinson ?

What are decent index alternatives to the S&P 500?

No, it never has been, it’s large cap stock. I use total stock market index and also have medium and small cap index funds, and some international. So I end up with a small-mid cap tilt.

 

[audreyh1]

Sure. It's 100% large cap US stocks.

+1

 

[OldShooter]

I recall a similar comment being made in another thread. The bottom line may have been than there are sectors within a market index fund like S&P 500, but to a great extent those who write about investing do not call the S&P 500 a sector.

I call the S&P 500 a category, but that may be incorrect too.

I don't know that there is "correct" or "incorrect." I use the word "segment" or "sector" consistent with the common dictionary definitions, which usually go somethng like:

"one of the constituent parts into which a body, entity, or quantity is divided or marked off by or as if by natural boundaries"

And there are lots of "boundaries" by which one can slice the equity pie: capitalization, line of business, country of domicile, etc. And one can even make double slices like "emerging market small cap" or "EAFE energy."

But regardless of the word used, it is still true that the S&P 500 is a minority slice of the world market. In terms of market cap it is maybe 35%. In terms of companies/nose-count it is around 7%. It's a majority vs US stocks capitalization but on a nose-count basis it is less than 15%.

 

[Qs Laptop]

Sure. It's 100% large cap US stocks.

And what percent of VTWAX is large cap stocks?

I see the median market cap of VTWAX is $49B.

 

[OldShooter]

And what percent of VTWAX is large cap stocks? ...

Oh, probably a big chunk. I really don't care. But the point is that it is not a sector fund. As a matter of policy I try to not bet on sectors. Any quilt chart (https://www.callan.com/periodic-table/) will show the reason.

I am also skeptical of "tilt" although I admit to having played around with a single-digit percentage of our portfolio. I am at almost the two-year mark with such an experiment and it is not going well. Two years is not a long time, of course.

 

[Tiger8693]

I'd say there's not really a significant enough difference to drive one way over another....

 

[jazz4cash]

I recall a similar comment being made in another thread. The bottom line may have been than there are sectors within a market index fund like S&P 500, but to a great extent those who write about investing do not call the S&P 500 a sector.



I call the S&P 500 a category, but that may be incorrect too.

The point of using SP500 is to be broad. The point of using a sector fund is to be narrow.