Sunday, January 27, 2013

Why You Shouldn't Think Of The S&P 500 As A Diversified Basket Of 500 Companies - Seeking Alpha

Why You Shouldn't Think Of The S&P 500 As A Diversified Basket Of 500 Companies - Seeking Alpha:
The S&P, like most indexes, is a market-weighted index.  So the larger the stock, the more the influence.  This is demonstrated in this article from Seeking Alpha:

Two look-ins:
"...the top five holdings of the Vanguard S&P 500 ETF (VOO). They are Apple (AAPL), Exxon (XOM), General Electric (GE), Chevron (CVX), and IBM (IBM)....for every $100 that you invest in the Vanguard S&P 500 ETF, $3.90 gets invested into Apple, $3.10 gets invested into Exxon, $1.70 gets invested into General Electric, $1.70 gets invested into Chevron, and $1.60 gets invested into IBM. In other words, when you are purchasing a basket of 500 companies, you are really putting 12% of your wealth into just five companies alone."
and
"...the Vanguard S&P 500 ETF owns $5.7 billion worth of Apple stock. Let's compare that to the weighting of, say, the 400th weighted stock in the S&P 500. That would be Cincinnati Financial (CINF). The S&P 500 ETF only owns $50 million worth of the insurance firm."
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