This Is Why You Are Losing To The S&P 500

You recently looked at your very diversified portfolio and compared it to the return of the S&P 500 (SPY), and to your shock, you are underperforming the market. You start to wonder how that can be. You own quality companies and have held their own in 2020 if not even produced a nice return. You also own an excellent mixture of industries, whether it's through individual stock holdings or Exchange Traded Funds.

You are well diversified and have produced a good return over the years and stayed within the S&P 500. But now, all of a sudden, the market is bouncing your performance. Well, shockingly, this may not be because your portfolio isn't good. You haven't been diligent enough following along with your holding's performance and business strategies in the future.

It very well likely has nothing to do with something you may have or have not done. It is likely, the way the S&P 500 is structured and how your portfolio isn't structured.

The S&P 500 is structured by market capitalization. That means the largest companies from a market capitalization standpoint, in the S&P 500 carry more weight in the portfolio than companies that are smaller in terms of market capitalization.

For example, Apple (AAPL) is the largest company in the S&P 500, with a market capitalization of $2.13 trillion and has a 7.06% weighting in the S&P 500. The smallest company in the S&P 500 is Coty Inc. (COTY), which has a market capitalization of $2.83 billion and a weighting of 0.003679% in the S&P 500 index.

This means that if say Coty would start performing really well from a business standpoint and the stock price doubled from where it sat today and, therefore, it's weighting in the index doubled, it still would be a drop in the bucket compared to Apple. Coty's stock could, as we said, double in price, and in terms of how it would affect the S&P 500, it would be roughly similar to if Apple's stock price gained, let's say, less than a 1% in value.

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What Coty's stock price does, is essentially irrelevant to the S&P 500 index. And for the most part, that is true of not only the bottom say 10, 25, 50, even 100 stocks in the S&P 500. But it's true for almost the whole bottom 200 stocks in the index. You see, once you hit stock number 300 of the S&P 500, all of the stocks below that point represent less than 0.058% of the index. In reality, the bottom 200 stocks in the S&P 500 are almost the same importance as just one stock.

You guessed it! Apple's index weighting to the furthest decimal is 7.069809%, and the bottom 200 stocks in the index represent 7.11465% of the index. Let that sink in.

As I said, this means before this means any of those bottom 200 stocks can double, triple in value, and in reality, it doesn't mean anything to the S&P 500 index. The only stocks that make a difference are the top say 100, 50, 25, or maybe just the top 5?

The top 100 stocks in the S&P 500 represent 70.9803% of the index, which means the other 400 stocks only make up 29% of the fund. And we already saw that the bottom 200 only represent 7.11%, meaning the 200 stocks that start after the 100th and end before the 300th stock make up just 22% of the entire S&P 500. Some of the companies that fall in the range are FedEx (FDX), eBay (EBAY), Kroger (KR), AIG (AIG), Best Buy (BBY), Hilton Worldwide (HLT), and Kraft Heinz (KHC), to name a few.

The top 50 stocks in the index represent 56.22232% of the index, which is crazy to think that 50 stocks make up more than 50% of the index when the index as a whole is comprised of more than 500 stocks. But it gets worse because the top 25 stocks make up 42.42422% of the index. Yes, you are reading that right. That means that the 26th through the 50th largest stocks in the S&P 500 only makes up 13.7981% of the index. The stocks that fall in the 26th to 50th largest range are stocks like Bank of America (BAC), Comcast (CMCSA), Coca-Cola (KO) and Pepsi (PEP), Exxon Mobile (XOM), a company that just a few years ago was the largest company in the world, and McDonald's (MCD).

Now, are you ready for your mind to be blown?

The top 5 companies (6 stocks) in the S&P 500 currently represent 23.78% of the index. Apple (AAPL), Microsoft (MSFT), (AMZN), Facebook (FB), and Alphabet (GOOG). Let that sink in. Six stocks, but five companies (since Alphabet has Call A and Class B shares) control 23.75% of an index made up of 500 companies.

So, in reality, if you don't own Apple, Microsoft,, Facebook, and Alphabet, you haven't been able to keep up with the market because those five companies have been big winners over the last eight months. More so, if the funds you own don't hold those stocks, they have fallen behind.

And let's be honest, even if you own those stocks, or the fund you own holds those stocks if they didn't hold them in abundance, then you missed out on their incredible runs and are likely not matching the performance of the S&P 500.

In part two, I talk about what you should own if you want to beat the market moving forward but still be diversified and protected from single stock risk.

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor owned shares of Apple, Amazon, Exxon Mobile, Kroger, Microsoft, and Google 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.

One thought on “This Is Why You Are Losing To The S&P 500

  1. Very interesting conclusion that make me feel better because my $700K portfolio constantly lags behind S&P at few % points, and I was thinking why? Now, I have an answer.

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