You can read here about the late Jack Bogle’s concerns with index funds. Now they’ve crossed an ominous threshold: The market cap of the top five companies in the S&P 500 Index represent 18% of the total index capitalization, higher than at any time on record, including the Tech Bubble. Those companies are Apple, Microsoft, Alphabet (Google), Amazon, and Facebook.
When mutual funds and ETFs have a mandate to buy an index of stocks, like those in the S&P 500, research and analysis go out the door—there’s zero analysis—because the purchases are required. In replicating an index, the largest capitalization stocks come to dominate a portfolio. With the S&P 500, it’s the largest five that play the music—the rest are just groupies.
Before the music stops, perhaps you should seek an approach where stocks are picked according to their individual value.
Twice in this century the S&P 500 has crashed—first by more than 49% when the Tech Bubble burst, and then by more than 56% during the Financial Crisis. Perhaps it’s time for a change.
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