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This S&P 500 ETF Stock Is Way Less Reliable Than You Know

If you’d like to take a small position in 500 large U.S. companies, a convenient way do accomplish this is through the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Created back in 1993, SPY stock is a popular exchange-traded fund (ETF) designed to track the S&P 500 stock market index.

graphic of the phrase ETF sitting on a computer in front of an increasing line graph on top of a bar graph
Source: Shutterstock

Does SPY stock do its job well? According to the official website for the fund, SPY “seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of” the S&P 500 index.

I follow both SPY stock and its underlying index five days a week, and I’ve found that on any given day, SPY is usually within 5% of the S&P 500’s performance. Moreover, over the long term, SPY matches the index quite well.

So, SPY stock does its job, strictly speaking. Yet, there’s another issue that might bother safety-minded investors. It’s a problem which, I suspect, many shareholders aren’t even aware of.

A Closer Look at the S&P 500

SPY is not only the first ETF ever brought to the public, but it’s also the most popular one, even to this day.

The daily trading volume of SPY stock is enormous and beats the vast majority of stocks. I’ll give you an example. On Jan. 15, more than 107 million SPY shares changed hands.

Therefore, you can easily get into and out of positions with SPY stock. Plus, the bid-ask spreads generally will be narrow. Furthermore, you should be able to trade SPY through just about any popular U.S-based self-directed brokerage account.

As for the S&P 500 itself, this is a highly revered index that’s been around since 1957. For a company to be listed in the S&P 500, its market capitalization must be greater than or equal to $8.2 billion.

Also, the 500 components of SPY and the S&P 500 are weighted by market capitalization. In other words, not all 500 companies have equal representation in the index. Is that a good thing or a bad thing? That’s what we’re going to discuss next.

Unequal Representation

The website for SPY stock states that the S&P 500 “spans over approximately 24 separate industry groups.” This fact might provide comfort to set-it-and-forget-it investors who simply want to own the entire U.S. stock market.

Yet, let’s not assume that the 24 industry groups have equal representation in the S&P 500. InvestorPlace contributor Larry Ramer convincingly points out how a half-dozen names have come to dominate the index recently.

“Six Big Tech stocks now account for almost 25% of the S&P 500,” Ramer wrote. “Those six tech stocks are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN),  Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Tesla (NASDAQ:TSLA).”

Remember how I talked about taking “a small position in 500 large U.S. companies” at the beginning of this article? In actuality, perhaps some of the positions aren’t so “small,” after all.

Too Much Momo Is a No-No

Indeed, tech names have surprisingly heavy weightings in the S&P 500 and therefore in SPY stock.

As of Jan. 15, Apple’s weighting in the index and the ETF was a whopping 6.39%. Microsoft took up 5.06%, while Amazon represented 4.17%. We’re talking about nearly 20% of the S&P 500 being controlled by three stocks.

And all of the six stocks named by Ramer are definitely what I would call momentum or “momo” stocks. Their price performances since the stock market has bottomed out in March 2009, and since the more recent bottom of March 2020, have been astounding.

Let’s be honest here. Most stocks in the S&P 500 haven’t performed as well as Amazon, Tesla or Facebook. Airlines, energy names and retail brick-and-mortar stores have lagged. The economy hasn’t been booming for all economic sectors.

Yet, the six stocks named by Ramer have continued to march upwards relentlessly, for the most part. So, if you’re seeking more value and less “momo,” then SPY stock and the S&P 500 probably aren’t what you’re looking for.

The Bottom Line on the S&P 500

A balanced portfolio should have a reasonable mix of some high-momentum stocks and some less frothy value plays.

The way they’re currently weighted, SPY stock and the S&P 500 simply don’t offer the type of balance that cautious set-it-and-forget-it investors ought to be looking for.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/s-p-500-less-reliable-than-you-know/.

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