When I was a kid, I was a big fan of board games.
Concentration in particular was a game I was a big fan of. And when it became a live TV game show years later, hosted by a young Alex Trebek, I became an even bigger fan.
But there’s a different sort of concentration going on these days, not on a Hollywood sound stage but on Wall Street.
It’s a game of massive stock market concentration, where just a handful of companies account for an alarmingly large share of the major stock indexes.
In fact, CNBC reports: “The influence of a few big stocks over the market is at its most extreme level in 20 years.” Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT) and Facebook (FB) now account for nearly 20% of the total market value of the S&P 500 index.
That’s the highest stock market concentration since, you guessed it, right before the tech bubble burst in 2000!
In fact, the top 10 stocks (out of 500, mind you) in the S&P account for nearly one-quarter of the index value. Take a look at the Nasdaq 100 index (NDX) and it’s even more concentrated.
Those same five mega-technology stocks account for one-third of the market value of NDX, and the top 10 stocks account for more than half the index, even though there are a total of 103 stocks in NDX.
Concentration isn’t necessarily a bad thing — it’s fine as long as the stocks your money is concentrated in continue to go up. But as too many investors found out painfully in the aftermath of the 2000 tech wreck, what goes up eventually comes down and usually comes down much harder and faster.
One solution to the concentration game on Wall Street today is to avoid traditional market cap-weighted investments such as a standard S&P 500 index fund or an ETF like SPY.
Consider an equal-weighted ETF instead such as Invesco S&P 500 Equal Weight ETF (RSP), where the top 10 stocks make up only 2.5% of the total market cap.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch