You might be surprised how a handful of stocks have so much influence over an index worth $28tn
Thursday 13 Feb 2020 Author: Martin Gamble

When people talk about US stock markets they are usually referring to the Standard and Poors (S&P 500) index. One reason why it’s so popular is that it represents around 80% of the whole US stock market.

S&P 500

Over $10tn of assets are benchmarked to the index including $3.4tn of indexed products.

It may come as a surprise given the sheer size of the index, but its performance is often determined by just a handful of stocks. Technology names Apple, Alphabet, Amazon, Microsoft and Facebook collectively represent close to 20% of the S&P.

Even a huge business such as Coca-Cola, which has a market capitalization of $252bn, pales into relative insignificance next to Microsoft’s £1.3tn market size. To illustrate the effect of this, Coca-Cola shares would need to increase by 5% for every 1% that Microsoft shares increase to have a similar impact on the S&P 500.

Recently Amazon released its fourth quarter numbers, which beat market expectations, exciting investors, which pushed its shares up by 10% or $90bn. This lifted the S&P 500 by 0.3% or around 10 points.

The technology sector has the most significant weighting in the index, representing 24%, while healthcare makes up another 14% and financials 13%, these three equating to half of the market.

The largest companies are often global enterprises and therefore receive some revenue and profit from international markets. In aggregate, around 43% of the S&P index’s revenues come from outside the US.

The tech sector is the most international, with 57% of its revenues coming from overseas.

The materials and consumer staples sectors also make half of their revenues outside of the US. Good examples are chip maker Intel and ‘Ariel to Gillette’ consumer brands business Procter and Gamble.

At the other end of the spectrum are the domestically focused sectors like utilities (3% of revenues), real estate (15%) and financials (22%).

What this means is when the US economy struggles relative to global markets the share prices of companies with the greatest international exposure do relatively well and outshine the more domestic players.

And because technology, materials and consumer staples make up around a third of the index, the ‘international effect’ on the performance of the S&P 500 can be significant.

Related to this effect on the index is the currency tailwind that international companies get from a weak US dollar, which boosts the value of overseas earnings.

That said, some companies protect themselves against financial loss by hedging their non-dollar currency exposure, which also mitigates potential gains.

Over the last five and 10 years respectively, the S&P 500 index has delivered total returns (including dividends) of 79.2% and 269.8% respectively.

You can gain passive exposure to the flagship US index through the Vanguard S&P 500 ETF (VUSA).


The Nasdaq Composite index is a broad-based benchmark comprising around 2,700 companies.

Along with the S&P 500 and the Dow Jones Index it is one of the most widely followed indices in the world. Founded in 1971 the name is an acronym of the National Association of Securities Dealers Automated Quotations.

The 10 largest companies comprise 35.5% of the index, dominated by technology businesses which represent half the Nasdaq.

The tech sector itself is comprised of 377 companies, equating to around 14% of the 2,700 companies in the index. This underlines the mega-cap nature of the larger tech names.

Apple and Microsoft dominate the index with weights of 10% and 9% respectively.

While the Nasdaq is broad-based when measured by the number of companies, it is actually very concentrated with the largest 25 (less than 1% of all companies in the index) companies having a combined index weighting of 56%.

Don’t be fooled though, just because the companies below the top 25 are small in index weight terms, some are still  very large.

For example, online travel booking company Expedia has a market cap of $15.6bn, which makes it bigger than half the companies in the FTSE 100 index.

Remarkable as it sounds, even if its’ shares were to double, adding another $15.6bn to its value, the impact on the Nasdaq would only be roughly equivalent to a 1% move in the shares of Apple. (market cap $1.4tn)

Outside of the dominant technology sector, consumer services are the next biggest sector with an index weight of 19%. Like tech it is dominated by large cap companies.

By contrast, healthcare is dominated by smaller cap names (think biotech minnows) and the most populous sector with 757 companies or 28% of all the companies in the Nasdaq. It is also the third largest by index weight. (10.2%)

One way of getting passive exposure to the Nasdaq is iShares Nasdaq 100 UCITS ETF (CNDX).

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