Market-Cap-Weighted Investing Has Been Good, But Will It Last?

The major US, and well world indexes, for that matter, are all market capitalization-weighted indexes. This means the index will own a particular amount of one company or another based on that company’s market cap. On the surface, this sounds fine. And decades ago, when the indexes were really starting, this method worked just fine. It was a fast, easy, and simple way for investors and money managers to put together the index.

But fast forward to today and beyond, and market cap indexes may not be the best solution due to the simple issue of the index being too heavily weighted. In a past article, I highlighted how the top 5 companies in the S&P 500 represented 23% of the index. That means 5 companies represent almost a quarter of what an index that supposedly tracks 500 companies is doing.

However, over the past few years, especially the past year, these top five companies, Apple (AAPL), Microsoft (MSFT), (AMZN), Facebook (FB), and Alphabet (GOOG), have performed incredibly well. So, investors who have ridden these market-cap-weighted indexes higher for a few years are very happy and have done very well.

However, there is always a downside risk, and with these market-cap-weighted indexes being so heavily weighted to the top 5 or 10 stocks, the risk is much higher than most investors fully understand. Continue reading "Market-Cap-Weighted Investing Has Been Good, But Will It Last?"

Will 2021 Prompt A Big Rotation In Sector Trends? - Part 2

In the first part of this research article, we attempted to provide some details to the question of “sector trends in 2021 and what may shift over the next 10 to 12+ months”. In that section of this article, we covered the broad market sector trends and highlighted how the COVID-19 virus event changed the way the global economy functioned for 8+ months. It also highlighted a number of trends that were already taking place in the global market – Technology, Healthcare, Discretionary, and Comm. Services. Quite literally, the past 20+ years have been a digital revolution for most of the world and that is not likely to change.

What will likely change is the demand for Commodities, Raw Materials, Agriculture, and Manufacturing/Distribution related to these core materials. We believe any resurgence of the global economy post-COVID-19 will consist of a resurgence in the demand for commodities and raw/basic materials as consumers extend their normal consumption growth at exceptional rates.

The question in our minds is how will this transition take place and over how much time? Will it happen suddenly as new global policy and restructuring take place? Will it happen more slowly as the global economy re-engages and rebuilds? Will it happen aggressively, disrupting other sector trends? Will it happen in a way that supports continued growth and appreciation of major sector trends? Continue reading "Will 2021 Prompt A Big Rotation In Sector Trends? - Part 2"

Will 2021 Prompt A Big Rotation In Sector Trends?

An interesting question was brought to my research team recently related to sector trends in 2021 and what may shift over the next 10 to 12+ months. We took the effort to consider this question and to consider where trends may change over time.

The one thing my research team and I kept returning to is “how will the global economy function after COVID and how much will we return to normalcy over the next 12 to 24+ months?”

We believe this key question will potentially drive sector trends and expectations in the future.

When COVID-19 hit the globe, in early 2020, a forced transition of working from home and general panic took hold of the general public. Those individuals that were able to continue earning while making this transition moved into a “protectionist mode” of stocking, securing, preparing for, and isolating away from risks. This shift in our economy set up a trend where certain sectors would see benefits of this trend where others would see their economies destroyed. For example, commercial real estate is one sector that has continued to experience extreme downside expectations while technology and Healthcare experienced greater upside expectations.

Longer-Term Sector Trends– What's Next?

When we look at a broad, longer-term, perspective of market sectors, we can see how many sectors have rallied, some are relatively flat, and others are still moderately weak compared to pre-COVID-19 levels. The top row of these charts, the $SPX (S&P500), XLY (Discretionary), XLC (Comm Services), and XLK (Technology) sectors have all shown tremendous rallies after the COVID-19 lows in March 2020. We can also see that XLI (Industrials), XLB (Materials), and XLV (Healthcare) have all started to move higher recently. Continue reading "Will 2021 Prompt A Big Rotation In Sector Trends?"

Post Inauguration And Extended Markets

Best Post Election and Inauguration Lift

The drumbeat of markets becoming more and more over-extended is becoming louder and louder. From the election to the inauguration, the S&P 500 is up 13%, which is the best for any president since 1952. Post-inauguration, all major indices as measured via the Russell 2000 (IWM), Dow Jones (DIA), S&P 500 (SPY), and the Nasdaq (QQQ) hit all-time highs. The broader markets have been propelled higher in an already frothy market as 2021 unfolds. All major markets have been in a raging, nearly uninterrupted bull market with the Nasdaq and S&P 500 up 100% and 75%, respectively, since the pandemic low.

These moves are a function of the vaccine rollout, continued stimulus coming out of Washington, massive fiscal and monetary accommodation from the Federal Reserve, the election cycle being capped off with the presidential inauguration, and new policies aimed at spurring economic growth. Despite these tailwinds, the markets are looking overextended, as assessed by a broad range of historical benchmarks and current indicators investors should heed in the near term.

Historical Measures and Current Indicators

A recent E-Trade survey showed that the majority of investors (91%) with $1 million or more in a brokerage account believe the stock market is in a bubble or close to being in one. From a historical standpoint, markets have exceeded levels reminiscent of the Roaring Twenties and are now approaching the dot-com bubble territory. These historical comparators of options put/call ratios, the broad participation of stocks exceeding their 200-day moving average, and P/E ratios may be potential warning signs of near-term pressures. Current indicators are also suggestive of frothy markets as measured by Bollinger bands and the Relative Strength Index (RSI). Continue reading "Post Inauguration And Extended Markets"

This Is Why You Are Losing To The S&P 500 - Part 2

In Part One, I discussed how heavily weighted the S&P 500's top stocks are and how, in reality, the bottom 200 stocks in the index don't even matter. Now I would like to talk about potentially better options than buying an S&P 500 index Exchange Traded Fund or mutual fund but still being diversified in a large number of stocks, with a wide range of diversity and having a good chance of beating the S&P 500's returns.

The biggest issue with the S&P 500 is that the top stocks carry all the weighting. The bottom stocks don't mean much. Instead of buying the SPDR S&P 500 ETF Trust (SPY), why not purchase something that doesn't hold as many positions and have all the assets focused on just the top companies. This way, when the bigger companies that mean more anyways move, you have more money in them. And since the larger companies are typically less volatile, your portfolio shouldn't have to worry about as many companies going bankrupt or falling apart as someone who owns the S&P 500 would have to be concerned with.

The first ETF I would like to discuss is the Invesco S&P 500 Top 50 ETF (XLG). The XLG is an ETF that tracks a market-cap-weighted index of the 50 largest US companies. In essence, it holds just the top 50 of the 500 companies that make up the S&P 500. The fund has a weighted average market cap of $668 billion and a yield of 1.34%. XLG also has an expense ratio of 0.2% and $1.65 billion in assets under management. XLG is up 19.19% year-to-date and more than 35% over the past 12 months. On an annualized basis, the fund is up more than 16% over the last 10 years, a figure that easily beats the market average of a little under 10%. Lastly, the funds top ten holdings represent more than 51% of the fund with Apple (AAPL) taking the top spot at 12.69% of the assets. Continue reading "This Is Why You Are Losing To The S&P 500 - Part 2"