The combined weight of the largest two constituents in the S&P 500 has reached an all-time high.
Apple and Microsoft now comprise 13.3% of the S&P 500 by weight, the highest level on record, the Wall Street Journal reported. As the FAANG stocks -- Facebook parent Meta, Amazon.com Inc., Apple, Netflix Inc., and Google owner Alphabet -- have been negatively impacted due to macro conditions, Apple and Microsoft have gained a higher share of the index.
FAANG stocks dominated the cap-weighted S&P 500 for years, reaching a peak in August 2020, and have since edged down to 21% of the index by weight. Notably, a couple of these mega-cap names contributed meaningfully to the sharp declines and volatility in the S&P 500 last year.
"Advisors using a market cap-weighted S&P 500 approach better really believe that Apple and Microsoft can continue to dominate going forward, whereas those less zealous should give an equally weighted version greater consideration," Todd Rosenbluth, head of research at VettaFi, said.
The Invesco S&P 500® Equal Weight ETF (RSP) removes size bias and mitigates concentration risk by giving each security an equal weight. RSP tracks the S&P 500 Equal Weight Index and includes the same constituents as the cap-weighted S&P 500, but each company in the S&P 500 EWI is allocated the same weight -- 0.2% -- at each quarterly rebalance.
See more: How Does RSPE Compare to RSP?
Concentration risk is a growing concern among advisors. In a 2022 survey, 69.7% of advisors said they were concerned or very concerned about the concentration of the top five names in the S&P 500. 22.5% of advisors were “just a little” concerned, and just 7.7% of advisors said they were not concerned, according to “When Markets Wobble, Cash Remains King: Free Cash Flow Investing.” (Date: August 30, 2022. Sample size: 293 respondents, 37.9% RIAs.)
For an equal-weighted strategy, the simple arithmetic of rebalancing connects equally weighted indexes to momentum effects. If the price of a constituent increases by more than the average of its peers, then its weight in the portfolio will increase, and the position will necessarily be trimmed at the next rebalance as the portfolio returns to equal weights.
On the other hand, if a stock falls by more than the average of its peers, its weighting will fall too, and more must be purchased at the next rebalance to return to equal weight. Thus, equal-weight indexes sell relative winners and purchase relative losers at each rebalance, adding a value tilt to portfolios.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.