Big Winners Dominating Index Funds. So?

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Leesbro63
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Big Winners Dominating Index Funds. So?

Post by Leesbro63 » Sat May 30, 2020 7:58 am

Interesting article here. My question is "so what"? If the big winners dominate index funds, isn't that good? Or, is it likely to end in tears as the article suggests?


https://fortune.com/2020/05/30/coronavi ... -covid-19/


"Starting last year, their weight in the S&P 500 jumped, then exploded in 2020 as they defied the COVID-19 crisis: The Fab Five, along with the likes of Netflix and Salesforce.com, got much more expensive while the rest of the market got a lot cheaper. So most big-cap funds load you up on the hot names that have been soaring, and go light on what's beaten down to dirt cheap—think financials and energy. "People risk buying into indexes that are top-heavy with these high-priced stocks," says Chris Brightman, chief investment officer at Research Affiliates, a firm that oversees strategies for $145 billion in mutual funds and ETFs. "We've seen these patterns before, and they usually end in tears."

andrige
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Re: Big Winners Dominating Index Funds. So?

Post by andrige » Sat May 30, 2020 8:24 am

To me, the growth of the tech giants has seemed a bit fast. I'm certainly not going to bet against these companies because I do think they are the future. However, I wouldn't be surprised if we start seeing some slower growth in these stocks. It certainly reinforces my belief about proper diversification and not over-weighting funds that are doing well. Due to the recent performance of these tech giants, some people have been shifting more towards US or adding tech sector funds. This doesn't seem wise to me.

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SimpleGift
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Re: Big Winners Dominating Index Funds. So?

Post by SimpleGift » Sat May 30, 2020 8:34 am

Leesbro63 wrote:
Sat May 30, 2020 7:58 am
My question is "so what"? If the big winners dominate index funds, isn't that good? Or, is it likely to end in tears as the article suggests?
Ben Carlson has a more sober, instructive article on the current concentration of S&P 500 stocks:
Ben Carlson wrote:While the 25% concentration in the top 10 names today feels high, that’s right where it was in 1980. And the market was even more concentrated if we take things further back. In 1965, AT&T made up nearly 8% of the index. General Motors was another 7%. The top 10 holdings were 34% of the S&P 500. In the early 1960s the top 10 holdings at one time made up over 50% of the S&P!

Concentration has always been a part of the stock market’s structure. Today is no different than the past in that respect.

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greg24
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Re: Big Winners Dominating Index Funds. So?

Post by greg24 » Sat May 30, 2020 8:48 am

More accurately would be: "Big Winners Dominating Mutual Funds. So?"

The index reflects the market.

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firebirdparts
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Re: Big Winners Dominating Index Funds. So?

Post by firebirdparts » Sat May 30, 2020 10:56 am

What does this say about people who bought index funds 10 years ago? How do they feel?
A fool and your money are soon partners

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