SPY: Things Are Getting Interesting, but for Some Overlooked Reasons

The benchmark ETF is losing some of its diversity, but that might not be so bad

The SPDR S&P 500 ETF (NYSEARCA:SPY) has $311.56 billion in assets under management, making it the world’s largest exchange-traded fund. And the competition isn’t particularly close. SPY’s assets advantage over the second-largest ETF is more than $105 billion.

SPY: Things Are Getting Interesting, but for Some Overlooked Reasons
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To put that $105 billion-plus gap into context, the assets advantage sported by SPY over the next biggest ETF exceeds the market capitalization of Dow Jones components 3M (NYSE:MMM) and Goldman Sachs (NYSE:GS).

As its name implies, SPY tracks the S&P 500 index, one of the world’s most widely watched equity gauges. That’s the same index followed by the number two ETF in terms of size – the iShares Core S&P 500 (NYSEARCA:IVV) and the number four Vanguard S&P 500 ETF (NYSEARCA:VOO). To exceed SPY in terms of heft, IVV and VOO would have to combine.

With annual expense ratios of 0.03% and 0.04%, respectively, VOO and IVV are cheaper than SPY. But that’s not to say SPY is expensive. Its annual expense ratio of 0.0945%, or $9.45 on a $10,000 investment is tolerable.

Beyond the Basics

The S&P 500 is a cap-weighted index, meaning the largest domestic companies by market value command the largest percentages of the benchmark’s weight. Still, with SPY and friends being home to 506 stocks (506, not 500, due to dual share classes), it’s reasonable to expect holdings-level diversity, not the concentrated rosters found on some more narrowly focused funds.

This is where things for SPY (and IVV and VOO) get interesting. To start 2020, stocks are extending last year’s rally, but leadership isn’t really changing. Many of the mega-cap names that performed well in 2019 are doing so to start 2020. Market values on those stocks are increasing, meaning their allocations in SPY are doing the same.

With its post-earnings pop in Thursday’s after-hours session, Amazon (NASDAQ:AMZN) joins Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) in the $1 trillion club. At this writing, State Street’s data, SPY’s issuer, was still on Jan. 29, but heading into Thursday, Apple, Microsoft, Amazon and the two classes of Alphabet combined for 15.78% of SPY’s weight.

It has been nearly 11 years since one member of the S&P 500 commanded 5% of the index and, if you can believe it, Exxon Mobil (NYSE:XOM) was the last one to do it. Today, Apple and Microsoft appear poised to enter the “5% SPY” club.

“If Apple is able to cross the threshold, it might not be long before it has company. Microsoft Corp.’s weight in the S&P 500 sits at 4.86%,” according to Bloomberg. “That’s the heaviest the Redmond, Washington-based company has been in the index since the dot-com frenzy at the turn of the century. Microsoft topped the 5% barrier for a single day in December 1999.”

Bottom Line on SPY

Indeed, it’s unusual for the top two S&P 500 holdings to combine for 10% of the benchmark’s weight. That scenario hasn’t been seen in 30 years.

There’s also the issue of sector-level diversity. There are 11 sectors represented in the S&P 500, but four – technology, healthcare, financial services and communication services – combine for about 61%. Then there’s the decline of the energy sector. If Exxon and Chevron (NYSE:CVX) bleed much more market value, the energy sector will be in danger of dropping below utilities as the third-smallest group in SPY.

One more thing: as noted in the Bloomberg quote above, the dominance of Apple and Microsoft in SPY are conjuring up images of the tech bubble. Rest assured that Apple and Microsoft in 2020 (and Alphabet and Amazon) are infinitely more sound, fundamentally and structurally speaking, than some of the fly-by-night outfits that took on out-sized percentages of equity benchmarks in 1999 and 2000.

As of this writing, Todd Shriber did not own any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/spy-etf-not-diverse-but-still-strong/.

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