Amazon's October Drop Hurting ETFs

Most recent data shows 246 different Exchange Traded Fund’s owned more than 24.7 million shares of (AMZN). But, the companies recent 20.9% decline in the month of October alone, (Amazon opened October trading at $2,021 per share and closed the month trading at $1,598 per share, or a 20.9% decline) has certainly had an effect on not only those 246 different ETFs and their investors, but also those investors whom may have directly purchased shares of the company. Furthermore, due to its market capitalization, it was a very heavily weighted stock in some large ETFs, which makes its recent decline even more painful.

Some of the hardest hit ETFs over the last month was the SPDR S&P 500 ETF Trust (SPY) because Amazon was its second, now third, largest holding and SPY was the single largest owner of Amazon stock. ProShares Online Retail ETF (ONLN) had 22% of its assets in Amazon as of late, while the Vanguard Consumer Discretionary ETF (VCR) and the Consumer Discretionary Select Sector SPDR Fund (XLY) both had more than 20% of their assets in Amazon.

Throughout the ETF world, there where eight different ETFs which had more than 10% of their assets in Amazon in recent weeks. Most were in the consumer discretionary sector, but a few internet focused ETFs such as the Invesco QQQ ETF (QQQ), and the First Trust Dow Jones Internet Index ETF (FDN) had more than 9% of their assets in Amazon.

In addition to being a significant position in some ETFs, due to its run-up in recent years, it indeed could have become a substantial position in some investors individual holdings as well, (I personally have been part of this group).

Since Amazon had become so large in some ETFs (and some individuals portfolio’s) the 20% decline in October could have been even more painful to those investors who didn’t properly diversify their holdings. In the past, I have warned investors about the issue of owning too many ETFs and how they should do some research on the ETFs which they own so they could avoid having oversized exposure to one single company, such as in this case Amazon.

Examples of this would be if you owned multiple ETFs mentioned above, such as the QQQ and the XLY. On the surface, you may have felt that since you purchased an internet-focused ETF and a consumer discretionary ETF, that you would be well diversified. But in reality, you were highly exposed to Amazon, and you have likely felt the recent drop

One of the big reasons ETFs have gained popularity in recent years is because of how easy they make it for the average investor to diversify. But when those investors don’t research what it is exactly they are buying, the underlying stocks that make up the ETF, they may not truly be as diversified as they think they are or would like to be.

Investors should take the recent drop in Amazon as a warning of what may be to come. It has been nearly a decade since we saw the market drop in 2008-09, meaning an investor who started saving in the past eight years has never dealt with a real bear market. During bull markets, it usually doesn’t matter all that much whether you are genuinely diversified since the market as a whole is moving higher, plus, whether your making 10% return or 15% return isn’t usually as big of a deal to investors, because, at the end of the day, they are making money. But, in bear-markets, diversity is more important. While the 5% difference may not be a big deal in a bull market, a 5% difference in a bear-market seems huge. Being properly diversified could be the difference between losing 5% instead of losing 10%.

So, regardless of whether or not you own (AMZN), take a look at your holdings and the holdings of the ETFs you own and confirm that you’re not over-weighted anyone stock. So, if we see a bear market or just a single stock drop, your portfolio isn’t overly affected.

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held held positions in at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.