About That Index Fund That You Thought Was Diversified……

About That Index Fund That You Thought Was Diversified……

Everyone knows that when you buy an index fund that you are getting a widely diversified investment right?

The S&P 500 is after all made up of 500 different companies.

Look more closely my friends. Those index funds that you are buying today are much more concentrated in a few names than you think.

Investors owning an S&P 500 index fund have more than 15 percent of their investment in just 7 big tech names. Those would be the FAANG brothers plus Microsoft and Nvidia.

If your index investment of choice is the Nasdaq 100 instead of the S&P 500, then 48% of your cash is going into just those 8 big tech companies.

That probably isn’t the diversification that index fund investors are looking for.

Making this much worse is the fact that these big tech companies are expensive. For example the stocks that are included in the NYSE FANG+ Index have valuations that are three times the valuation of the entire index.

That means that index investors are not only concentrated, they are concentrated on very expensive stocks.

We are getting closer by the day to the cycle turning back in favor of the active manager and away from passive investment vehicles. There is a whole generation of stock market investors who have entered the market after the end of the financial crisis who aren’t going to know what hit them when these inexperienced passive funds race for the exits.

Be ready for it.