How Is Apple Affecting Your Funds?

by Daniel Putnam | August 27, 2012 11:50 am

Let’s face it: It’s Apple’s world, and we’re all just living in it.

In case you haven’t heard, Apple (NASDAQ:AAPL[1]) now has the largest market cap of any stock in history.* At $635 billion as of Monday, Apple is a behemoth of epic proportions — and this is having a major impact on just about every other segment of the U.S. market. The stock’s outstanding performance (+76% in the past year) has contributed to:

As a result, anyone who owns a broad-based ETF is, to some extent, making a peripheral bet on Apple. So far, nobody’s complaining. Still, investors need to be aware of just how much of their ETFs’ performance is being driven by the tech giant. The table below reveals some truly incredible numbers:

iShares Dow Jones U.S. Technology
Sector Index Fund
IYW[4] 24.5%
Select Sector Technology SPDR XLK[5] 20.7%
Vanguard Information Technology ETF VGT[6] 20.6%
PowerShares QQQ Trust QQQ[7] 19.7%
Fidelity Nasdaq Composite Index Fund ETF ONEQ[8] 13.2%
Vanguard Growth ETF VUG[9] 9.0%
iShares Trust S&P 500 Growth Index Fund IVW[10] 8.9%
iShares Russell 1000 Growth Index Fund IWF[11] 8.8%
SPDR S&P 500 ETF SPY[12] 4.9%
iShares Trust Russell 1000 Index Fund IWB[13] 4.3%

One interesting aspect of Apple’s growing influence is that the NASDAQ OMX Group (NASDAQ:NDAQ[14]) conducted a special rebalancing[15] the NASDAQ 100 Index (NDX) in spring 2011 to address this very issue. Apple had risen to more than 20% of the index (and by extension, QQQ), and the rebalancing brought the stock’s weighting down to roughly 12%.

Now, after just one year, Apple is again weighted at just below 20%. Investors might be wondering if another rebalancing is in the offing, given the market volatility that surrounded the last announcement. Under the current rules, the answer is no — NASDAQ won’t rebalance the index until:

  1. A single stock rises to a weighting of above 24% (which, all else equal, would require a move in Apple to approximately $810 from its current location in the $660 range), or
  2. All stocks with a weighting above 4.5% total more than 48% of the index. Right now, four companies fit the bill — Apple, Microsoft (NASDAQ:MSFT[16]), Google (NASDAQ:GOOG[17]) and Oracle (NASDAQ:ORCL[18]). Together, the four have a total weighting of about 38%.

A second interesting development from Apple’s large weightings is its impact on leveraged ETFs such as Direxion DailyTechnology Bull 3x Shares (NYSE:TECL[19]). The fund’s sole position is a three-times leveraged position in XLK, which means this fund essentially has become a leveraged bet on Apple. Again, there has been nary a whiff of protest: The ETF is up 82.5% in the past year, and 26.3% since Apple began the latest leg of its run on July 25.

Is this a problem? Not necessarily. As Jeff Reeves wrote earlier this week, the near-term outlook for Apple remains positive[20] even at its much higher price. However, Mark Hulbert of MarketWatch penned an interesting article showing that companies that rise to the top of the U.S. market cap rankings typically underperform the broader market[21] by about 5 percentage points in the subsequent 12 months. And more often not, the largest company has lost its status within two years.

The takeaway from this is nothing groundbreaking: As Peter Lynch advised us years ago, “know what you own.” In this case, anyone who purchases an growth-oriented or tech-focused ETF needs to be alert to just how much Apple they’re buying — especially if the stock’s meteoric ascent finally begins to slow.

* Unadjusted for inflation. When inflation is taken into account, Microsoft’s adjusted tech-bubble market cap is still well ahead of Apple.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

  1. AAPL:
  2. growth style:
  3. value:
  4. IYW:
  5. XLK:
  6. VGT:
  7. QQQ:
  8. ONEQ:
  9. VUG:
  10. IVW:
  11. IWF:
  12. SPY:
  13. IWB:
  14. NDAQ:
  15. special rebalancing:
  16. MSFT:
  17. GOOG:
  18. ORCL:
  19. TECL:
  20. near-term outlook for Apple remains positive:
  21. typically underperform the broader market:

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