Market Concentration Update and Action Items

About a month ago I commented on the record concentration in the top 5 names of the S&P 500.

I want to briefly follow up on that and also summarize some action items I’m taking within portfolios.

This updated chart from Charles Schwab shows that concentration in the top 5 names has now reached 22% of the entire S&P 500!

top 5 stocks weight of S&P 500

Source: Charles Schwab, Bloomberg, as of 6/30/2020. Past performance is no guarantee of future results.

So, what am I doing about it?

Up until recently, the stock/equity portion of client portfolios was almost entirely indexed. This means all the stock positions were held via very low-cost index funds and ETFs namely offered by Schwab and Vanguard.

This implies those index funds, and therefore client portfolios, were also becoming more highly concentrated in just a few top stocks, which I believe creates more risk / downside in the next downturn as these stocks could be poised to suffer much greater losses than the overall market and under-perform over the next decade.

Given those concerns, I’ve begun gradually shifting to actively-managed funds and away from the indexed funds. Whereas passive / indexed funds have far outperformed active funds as a whole over the last decade, I believe active managers may have the potential to outperform over the next decade.

As Hartford Funds illustrates in this chart, passive has outperformed active since the March 2009 lows, but the relative performance between active and passive appears to be cyclical meaning that passive may not always outperform.


Another option for folks instead of buying index ETFs and funds or actively-managed funds, is to use equal-weighted funds. As the name suggests, an equal-weighted S&P 500 fund might hold all the same stocks as an S&P 500 Index fund but instead of targeting the index weightings by market cap to mirror the index each of the stocks are weighted equally. This reduces the potential risks associated with a high concentration in just a few stocks that you’re getting when you buy a standard market-cap weighted S&P 500 Index fund.

Please note: This does not apply to “market timing” portfolios as the active component is the direct, proactive weighting decisions to/away from stocks over time ranging from either 0%-60% or 20%-80% stock target depending on the strategy employed.

Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.

This is NOT investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

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