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Today, about 18.5% of the S&P 500 is tied to technology and telecom stocks. That's second to financials, at 22% of the index's total value. Add the health-care sector, at 12%, and more than half of the index is represented.
But at the peak of the technology boom in March 2000, for instance, highflying tech stocks commanded 34.5% of the S&P 500, while the equally heated telecommunications sector reflected an additional 7.4%, effectively transforming the benchmark into a large-cap tech and telecom index just when many of these stocks were priced to perfection.
In the resulting bear market that persisted through most of 2002, index-fund investors found no shelter as the S&P 500 lost half its value. After that painful episode, traditional indexing came under attack. Newfangled mutual funds and ETFs now cut the S&P 500 into creative slices, ranking stocks on earnings and valuation measures, dividend yield and even an "equal-weighted" portfolio that gives all 500 companies a 0.20% share of the index regardless of market capitalization.
Such alternatives are not only less risky than a market-cap-weighted index, but they also outperform, says Jeremy Siegel, a Wharton School finance professor and a director of WisdomTree Investments, which offers ETFs that rank stocks based on dividends and earnings. He said that tests of this strategy show "better resistance in down markets, less volatility and higher return."
A global portfolio
To most investors, the S&P 500 is the stock market's apple pie, a uniquely American product. In fact, though the benchmark companies are U.S.-based, their customers are increasingly global. The S&P 500 has so much total international-sales exposure, your stock portfolio might not even need a separate international component for diversification.About 45% of the revenue of S&P 500 companies comes from outside the U.S., and that figure could hit 50% by the end of the year, according to Silverblatt, the S&P analyst.
For example, ExxonMobil (XOM, news, msgs), the biggest S&P 500 company at 3.3% of the index, derives around 70% of its sales outside the U.S., while No. 2 component General Electric (GE, news, msgs), a 2.9% index position, brings in half its revenue from abroad.
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"It's like buying a global stock fund," Silverblatt said. "You do have a lot of direct and indirect foreign exposure."
With indexing, bigger isn't always better, but it is stronger. The S&P 500 is a concentrated index, and stocks with the largest market value -- stock price multiplied by the number of publicly available shares -- have the greatest influence on index returns.
The top 10 constituents in the S&P 500 now account for 20% of the benchmark, and the 50 biggest companies make up almost half the index.
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"The intent of the index is to represent the market, and not to pick the best issues or the worst issues," Silverblatt said. "They have liquidity, size, representation and profitability. We also have many issues that are not making money, but that's the way in the market."
| 10 largest S&P 500 stocks* | ||
|---|---|---|
Rank | Company | Market capitalization (in billions) |
1 | $437.3 | |
2 | $363.2 | |
3 | $272.9 | |
4 | $254.4 | |
5 | $248.1 | |
6 | $226.8 | |
7 | $198.5 | |
8 | $198.4 | |
9 | $181.7 | |
10 | $176.0 | |
*As of April 4 | ||
This article was reported and written by Jonathan Burton for MarketWatch.
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