U.S. Stocks: Moving Target

Written by: Global Thought Leadership | December 08, 2017

Source: Bloomberg, 12/7/17. Past performance is no guarantee of future results. Indexes are un-managed, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • “Passive”, index-based vehicles have their uses, but also distinct built-in biases.
  • Case in point: the impact of weighting stocks by market-capitalization, as practiced by leading equity indexes like the S&P 500.
  • Nowhere is that more obvious now than in the expansion of the technology sector, thanks to the run-up in mega-tech stock prices.
  • When a narrow group of stocks is in demand, as mega-tech has been, their price gains result in them being a bigger part of the index. But what goes up can go down, and the result can be heightened exposure to downside risk as they become a bigger and bigger part of a portfolio.
  • Consider how the S&P 500 index’s composition has changed since the end of Q3 2016.The closely-watched Information Technology (IT) sector’s share of the index has moved up over four percentage points, to a peak of 24.8% on November 24, 2017.1   
  • In contrast, the broad-based Consumer Staples (CS) sector dropped about 2 percentage points since the end of Q3, down to a low of 7.8% of the S&P500 on November 6, 2017. 
  • The widest disparity between the weights of the two sectors was a sizeable 16.9 percentage points, on November 6, 2017 – before the sell-off in the IT sector at the end of November.
  • One effect of the disparity: on November 6, the top three stocks in the IT sector accounted for 8.91% of the S&P500, 3.6 times the weight of the top three stocks in the CS sector (2.49%).
  • The bottom line for investors is that a downward move in a fashionable sector can cause many times the damage of the same downward move in a significant, but smaller sector.
  • All of which underscores the potential benefit to investors of having skilled active managers who can make allocation decisions unaffected by the accumulated biases – or potential for downside errors – embedded in supposedly unbiased cap-weighted “passive” indexes.   

1 Source: Bloomberg, December 7, 2017.


An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Active management does not ensure gains or protect against market declines.