Having 50 times the dollar investment in Apple as you do in Ford is a growing danger of S&P 500 ETFs and funds. Here’s how to lower your risk.
Diversification is the most powerful concept in finance. By holding many stocks, you can substantially reduce the portfolio’s risk. When some stocks are going up in value, others might be going down. A market event — say a rise in oil prices — will drop some stocks, but it will increase the value of others and leave yet other stocks largely unaffected.
This occurs because the rule for how much of a stock an S&P index ETF or fund holds is based on its market capitalization: the dollar price of a share multiplied by the number of shares it has outstanding. It’s basically the market value of the company.For example, Apple AAPL, +2.02% has 16 billion shares and each share is currently worth $150, so Apple has a market capitalization of $2.4 trillion. By comparison, Ford F, -0.39% has a $55 billion market capitalization.
This tech tilt in the S&P is at a historic high. The only time it came close was in 2000 and things did not end well that time around. Then, the S&P 500 fell nearly 50%, partly because the dot-com bubble in tech, telecom and media stocks violently burst.A chief reason for the growing significance of tech in the S&P 500 is the domination of companies where scale matters, perhaps even where a natural monopoly exists.