The S&P 500 has been viewed as the premier benchmark for US equity exposure for years, however, it can change drastically in a relatively short period of time.
One of the key talking points in the market over the last few years has been increasing market share by a handful of names within the S&P 500 Index (SPX). The impact on asset allocation and market behavior due to higher market concentration has at least been felt by most if not led to changes in how asset managers are handling money today. Market environments change over time, and while it doesn’t mean core tenants of our investment philosophy change, it does benefit us to understand how these changes affect your process. While the name of the index itself has not changed, the S&P 500 Index has significantly transformed so far this decade.
Looking at a snapshot of the holdings, weightings, and sector weightings of the SPDR S&P 500 ETF Trust (SPY) at the start of the 2020s versus now there are some glaring differences. To start, the top 10 holdings within the index tracking ETF have seen some changes. Procter & Gamble (PG), Visa (V), and Johnson & Johnson (JNJ) were knocked out of the top 10 with Tesla (TSLA), Broadcom (AVGO), and most notably Nvidia (NVDA) taking their spots. NVDA is now the largest holding within SPY. The starkest difference between the top 10 stocks from 12/31/2019 until the present is their total weight within the index. Entering the decade, the top 10 stocks in the SPX accounted for 22.64% whereas they now account for 37.98% of the SPX, an over 50% increase in total weighting. The largest stock entering 2020 was AAPL with a weighing of 4.57% and while its weight has increased to 6.21% today, NVDA is now the most weighted stock in the SPX at 8.02%.
The underlying sector exposure of the S&P 500 has also changed with most sectors declining in exposure. The only two exceptions are information technology and consumer discretionary with the former having changed the most. At the start of the 2020s, information technology was comfortably the largest sector in the S&P 500 and it has only gone on to expand its lead going from 18.81% to 33.55% in just under six years. Just over a third of the S&P 500’s sector exposure is solely in information technology. The biggest losers with respect to sector exposure were financials, healthcare, and consumer staples each dropping by more than two percent. Information technology is edging closer to 40% of the domestic equity benchmark which is many firms' limit when it comes to sector exposure for actively managed strategies.
The big names getting bigger has been good the S&P 500 from a performance perspective as it has gained almost 100% in the 2020s. However, this has increased concentration risk whether from a stock or sector perspective for people leaning heavily on the S&P 500 for equity exposure. As it stands today, for every $1 put into an S&P 500 tracking fund, $0.25 goes to just four stocks or $0.33 to a single sector. This is an important talking point with clients who may be more risk averse and think that simply buying and holding the “market” is relatively safe for their equity exposure. While this has been truer at some points in the past, it is not the case today. A simple question to ask a client, “Are you comfortable having 25% of your money in just four stocks?” I would go out on a limb and assume that most would not be comfortable in that situation, however, that is exactly what just owning SPY does for equity exposure. This is a great talking point for clients as it presents a very real problem with just “buying the market” and opens the door for what you, the advisor, can offer them as an asset manager.
