Many people have at least some of their money in an S&P 500 index fund because they are happy with how their investments have done over the last ten years. This has let you keep costs low while riding along with some great Big Tech acts.
But you might be surprised to learn that index funds like the $248 billion Vanguard S&P 500 ETF VOO 0.11% or the $562 billion SPDR S&P 500 Index ETF Trust SPY 0.11% (the first exchange-traded fund to track the U.S. large-cap benchmark index) have portfolios that are more than 19.5% concentrated in three companies: Microsoft Corp. MSFT 0.10%, Apple Inc. AAPL -0.71%, and Nvidia Corp. NVDA 0.66%.
Every single one of the 500 companies in the S&P 500 SPX 0.14% is held by both SPY and VOO. The index is based on market value, which favors stocks that have done well in the past. The three stocks at the top of the weighting have all done well over the long term. With profits put back into the company, Nvidia has grown by 419% in the last three years. On June 30, 2021, the fund’s schedule of assets for that quarter showed that it only made up 1.37% of the SPY portfolio. Now, it makes up 6.15% of the portfolio.
Nick Kalivas, who is in charge of Invesco’s factor strategy for the company’s exchange-traded funds, says that the S&P 500 has become “more growthy” over the past few years as a standard index.
Stocks are often put into two groups: growth stocks and value stocks. Growth stocks are usually those of companies that are making a lot of sales quickly. These stocks trade at high multiples to earnings, revenue, or book value. In the value camp, companies grow more slowly, sell at lower multiples, and are more likely to give large dividends to common shareholders.
The Nasdaq 100 Index NDX 0.51%, which is made up of the 100 biggest companies in the Nasdaq Composite Index, is often used as a measure of growth. The Nasdaq 100 Index is followed by the Invesco QQQ Trust QQQ 0.49% and is based on market capitalization. Kalivas told MarketWatch that “ten years ago, the overlap between the Nasdaq 100 and the S&P 500 was 20%. Now it’s over 45%.”
When interest rates go down, it costs less to borrow money, which can be good for value stocks. This could help explain the “rotation to value” strategies that have been getting a lot of attention in the financial news this summer, as people wait for a cycle of cuts to the goal range for the federal funds rate. Jerome Powell, the head of the Federal Reserve, said on August 23 that interest rates should go down.
If you are worried about how concentrated the S&P 500 is, you can look at a number of value-oriented index methods. The Invesco S&P 500 High Dividend Low Volatility ETF SPHD 0.10% uses a method that starts with the same baseline. Kalivas says that since the middle of July, buyers have put a net of $480 million into this fund, which has assets worth $3.7 billion.
The S&P Dow Jones Indices keep an index of 50 stocks that SPHD follows. The index is rebuilt twice a year, on the last business day of January and July. First, the company that makes the index picks the 75 S&P 500 stocks that have had the best dividend yields over the last 12 months. The list is then narrowed down to the 50 stocks that had the least amount of price change during the same time period. For the new portfolio, those 50 stocks are weighted by their dividend returns over the last 12 months.
Kalivas said, “The low-volatility screen is used to try to get rid of a dividend trap.” There may be a built-in warning for investors in a stock with a high dividend yield: the high yield may mean that the share price is low because some investors have avoided the stock because of a problem with the business.
It is thought that if a company that pays dividends has a lot of volatility, it will be hard for it to keep up its cash flow and income payments, Kalivas explained.
“It gives you some exposure to value as a side effect of the method,” he said.
Every month, the Invesco S&P 500 High Dividend Low Volatility ETF gives out dividends. It gives an SEC 30-day return of 4.16 percent. In the last 12 months, the company has paid out a total of $1.956 per share, which is a trailing dividend yield of 3.98%. Don’t like that yield? Remember that bank CD rates can drop quickly once the Fed starts to lower short-term interest rates.
