Much has been made this year of the incredibly narrow leadership in the S&P 500's performance year to date, the NASDAQ too for that matter. The 'Magnificent Seven' of Amazon, Microsoft, Meta, Nvidia, Apple, Alphabet and Tesla account for the vast majority of the gain in the S&P 500 so far. This group recently grew to 30% of the index so if you don't have 30% of your portfolio in those names, you are very likely lagging behind the index. I certainly am.
A normal investor who goes narrower than the broadest index funds will have years where they lag and years where they outperform and this is a year where I am lagging so far. There's simply no way I am going to concentrate 30% into so few names pretty much all from the same sector (AMZN is consumer discretionary in tech clothing). These names grew to 50% of the NASDAQ prompting a special rebalance.
RSP is the Invesco S&P 500 Equal Weight ETF. This fund typically outperforms the market cap weighted (MCW) S&P 500 but with more volatility. For years, RSP outperformed, this year has obviously been a different story. That 7.7% gain for RSP on the chart can be thought of as "the average stock in the S&P 500 is up 7.7%" but because of how lopsided the index is, it is miles behind MCW. Dispersion of this magnitude in the favor of MCW is not unprecedented but it is very rare. 2020, is the only incidence I can find since RSP started trading. The market was similarly narrow as the internet bubble built up but that predates RSP.
So, is it time to switch benchmarks? In my opinion, no. I don't think changing benchmarks due to what amounts to an anomaly makes sense. It is an undisciplined behavior that stems from impatience. We talk about this all the time, no portfolio strategy is perfect. Usually the context is that some given strategy, even a great strategy, will at times lag. But it applies too to what I will say is a potential flaw in market cap weighting. This happens every so often, probably does not indicate a healthy market but as we saw in 2020, it can resolve by the rest of the market catching up, it doesn't have to result in a 2000-era bubble popping.
I have no idea if the rest of the market will catch up or if this one will end very badly, we have no control over that. What we can control though is maintaining a reasonably diversified portfolio that won't go down with the index basis point for basis point in case it does end badly. It is much easier to talk to people about being up less than it is to talk about following something that turns out to be a bubble all the way down.
If you have 30% of your portfolio in those seven names then you are exposed to a lot of risk right now. If you're an indexer then you should not care. And again, there may never be a consequence for that risk, but not realizing the risk you're taking until after the blow up is not good portfolio/risk management.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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