There's a good chance you've noticed that Apple has been sliding
for the past three months.
If you hold a portfolio that is made entirely of index funds,
you're probably not worried about it.
If you're not very familiar with the funds you hold, though,
it's possible that you should be worried. Not all index funds are
equal. In fact, some equal-weighted tech-focused funds that do hold
Apple were able to rise yesterday even as the iPhone maker's stock
But first, a bit of background.
The benefit of most index funds is that they diversify away
single-security risk by holding a broad basket of stocks, generally
weighted by market cap, and instead isolate the "market" risk of
the market that you're trying to target.
That benefit lessens when you invest in an index with a narrow
stock universe and concentrated positions in its top holdings.
The culprit here, of course, is the Nasdaq-100 (don't get me
started on the Dow-it's just as bad, but doesn't hold Apple and is
thus irrelevant for the purposes of this blog).
The PowerShares QQQ Trust (NasdaqGM:QQQ) tracks the famed
Nasdaq-100, used incorrectly by many as a barometer for the broad
It fails badly as a broad barometer, though, because it only
holds nonfinancial companies listed on the Nasdaq. The Nasdaq has
been historically biased toward technology companies, and indeed,
so too is QQQ.
That means that if you're holding QQQ, you have a 60 percent
position in the U.S. tech sector, compared with 16 percent in the
S&P 500 Index.
Worse, you currently have a 16 percent position in Apple
So much for diversifying away single-security risk.
Over the past three months, Apple (NasdaqGS:AAPL) is down about
27 percent. The broader, more diversified S&P 500, as
represented by the SPDR S&P 500 ETF (NYSEArca:SPY), has
meanwhile returned about 7 percent over the same period.
QQQ is up about 3 percent-a significant difference considering
both funds are ostensibly indexing the same market.
Don't forget to check IndexUniverse.com's ETF Data
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