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Are You Really Diversified?

November 1, 2023

The S&P 500 is a stock market index that measures the performance of 500 of the largest publicly traded companies listed on U.S. stock exchanges. It is one of the most widely followed equity indices and is considered a reliable indicator of the overall performance of the U.S. stock market. While the Index comprises 500 different stocks from various sectors, all stocks do not receive an equal weighting. The S&P 500 uses a market-capitalization-weighted approach, where larger companies with higher market caps receive a higher weighting and therefore greater influence on the index’s value.

Today the five largest stocks, Meta (Facebook), Amazon, Apple, Microsoft, and Alphabet (Google) make up 23% of the S&P 500 weighting. Never have the top five holdings had such a disproportionate effect on the index’s value than they do today. The early 2000’s saw similar concentration among the largest holdings before the dot-com bubble burst. While we are not predicting a similar scenario unfolds, it’s worth understanding that market leadership evolves over time. The only name from 2000 that remains in the top five today is Microsoft.

We believe it is prudent to understand the inherent risks that stem from such significant concentration within the Index. We are utilizing investments and building portfolios that we feel deliver true diversification within the U.S. Large-Cap asset class.

By Ryan Zywotko, CFA®