Is the S&P a tech play?

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Gaston
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Is the S&P a tech play?

Post by Gaston »

Most will know that the S&P 500 is divided into 11 sectors. Below is the market cap of each sector.

Communication Services - 10%
Consumer Discretionary - 14%
Consumer Staples - 8%
Energy - 3%
Financials - 11%
Healthcare - 13%
Industrials - 8%
Information Tech - 23%
Materials - 4%
Real Estate - 3%
Utilities - 3%

Start with Information Tech, then add in Comm Services, which also is heavily tech (Alphabet, Facebook, AT&T, Netflix). Then, add in Healthcare, which also has a heavy tech bias. Maybe a bit of Financials too. Pretty soon the entire S&P 500 becomes a 40% (by mkt cap) tech play.

What do you think?
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fwellimort
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Re: Is the S&P a tech play?

Post by fwellimort »

I don't think companies in the 21st century can be categorized into these sectors so easily.

For instance, what is Amazon.
It has grocery stores (Whole Foods, Amazon Go, etc.), online grocery store (amazon.com), web services (AWS), entertainment/streaming (prime video, twitch, etc), deliveries, etc.
Amazon also sells consumer products like Amazon Basics jeans, Amazon Basics dishes, Kindle, Echo, etc.
And it also has health care (Amazon Pharmacy) and so on.

I think simplifying the world by forcing each of these giant companies into a single category is not representative of the real world.
Companies like Google, Microsoft, Amazon are pretty much in almost every industry today.
Hence, if you think companies like Amazon to be many companies under one hood, then I don't see anything wrong with these companies having a good chunk of the market cap in the S&P.
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David Jay
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Re: Is the S&P a tech play?

Post by David Jay »

The SP500 has a historic performance that is almost indistinguishable from “Total Market”. This makes it a reasonable representation of the market. It is the market that is currently assigning a high percentage of value to tech, not just the SP500. In the future the market may assign high value to life extending big pharma. Or Mars colonization. Who knows?

VTI (Total US Stock ETF) top 5 holdings:
Microsoft 4.4%
Apple 4.4%
Alphabet 3.2%
Amazon 3.2%
Facebook 1.8%
Last edited by David Jay on Tue Jun 22, 2021 3:37 pm, edited 2 times in total.
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Northern Flicker
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Re: Is the S&P a tech play?

Post by Northern Flicker »

The healthcare sector and financial sector are distinct from the tech and communications sector. But yes, the tech, communications, financial, and healthcare sectors are a sizable chunk of the US economy, and their market caps reflect that. One of the motivations of global diversification is to be better aligned with global GDP.
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1789
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Re: Is the S&P a tech play?

Post by 1789 »

It is dominated by tech currently but it wasn't the case always. And it probably will not be the case always in the future too. Remember the years energy sector dominating the index?
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arcticpineapplecorp.
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Re: Is the S&P a tech play?

Post by arcticpineapplecorp. »

tech makes up 25.5% of the total market (source: https://investor.vanguard.com/mutual-fu ... file/vtsax):

Image

so if you believe in total market investing which is the opposite of sector playing, then no.
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Re: Is the S&P a tech play?

Post by nisiprius »

Sectors are designed to classify companies into characteristic kinds of businesses, not to split the stock market up equally.

There are arguments for mirroring the actual composition of market as it exists. Most of them don't depend on sector composition in any way.

The S&P 500 was designed in 1957 to reflect the total market as well as could be done given the limitations in computer power at the time. Since then more inclusive indexes have been constructed, but the S&P 500 has always matched the total market pretty well. The S&P 500 was always designed to reflect the cap weights of its individual stock constituents. A rationale for doing this was set forth in 1922 by economist Irving Fisher in The Making of Index Numbers, which is why the Dow Jones Industrial Average is an "average," but the S&P 500 Index is an "index."

The S&P 500 never was intended to represent all sectors equally or anything like that. It is not as if once upon a time it was balanced and has become unbalanced.

The sector composition fluctuates. It just fluctuates. As far as I'm concerned, "it fluctuates, so what?"

Here's one chart showing how the composition has varied.

Image

Here's another.

Image
Last edited by nisiprius on Tue Jun 22, 2021 7:15 pm, edited 1 time in total.
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Gaston
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Re: Is the S&P a tech play?

Post by Gaston »

Northern Flicker wrote: Tue Jun 22, 2021 3:34 pm One of the motivations of global diversification is to be better aligned with global GDP.
I hadn’t thought of that, but I see your point. If other countries have a proportionally greater mix of auto manufacturers, confectioners, or whatever, then global diversification might provide a different industry tilt than the S&P 500, or even the entire US market.
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Triple digit golfer
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Re: Is the S&P a tech play?

Post by Triple digit golfer »

It's not a play at all. I don't even look at sectors (or styles or sizes, for that matter). They're often arbitrary. Also, what sense would it make to hold an equal amount of each? That is absolutely arbitrary.

It is what it is. Owning the S&P 500, for all practical intents and purposes, is holding the market as it stands. That, by definition, is the opposite of a play.
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Re: Is the S&P a tech play?

Post by Triple digit golfer »

Gaston wrote: Tue Jun 22, 2021 6:59 pm
Northern Flicker wrote: Tue Jun 22, 2021 3:34 pm One of the motivations of global diversification is to be better aligned with global GDP.
I hadn’t thought of that, but I see your point. If other countries have a proportionally greater mix of auto manufacturers, confectioners, or whatever, then global diversification might provide a different industry tilt than the S&P 500, or even the entire US market.
Bingo. You'll also have a different size and style mix.
whereskyle
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Re: Is the S&P a tech play?

Post by whereskyle »

The index was nearly 30% energy in the early 1980s. That sector's allocation has shrunk significantly. The return of the index has been 11.85% per annum. Was the index an energy play in 1980? If it was, the index has done fine even if its energy play didn't. This is the beauty of market-cap indexing.
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sc9182
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Re: Is the S&P a tech play?

Post by sc9182 »

whereskyle wrote: Tue Jun 22, 2021 7:57 pm The index was nearly 30% energy in the early 1980s. That sector's allocation has shrunk significantly. The return of the index has been 11.85% per annum. Was the index an energy play in 1980? If it was, the index has done fine even if its energy play didn't. This is the beauty of market-cap indexing.
Good point. Add to that industrials and defense Co. s — now you are talking way more back then ..

Hence Index investing .. don’t get swept up one way or the other due to in-favor or out-of-favor stocks or sectors over longer term ..
Trader Joe
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Re: Is the S&P a tech play?

Post by Trader Joe »

"Is the S&P a tech play?"

No, not at all.
Northern Flicker
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Re: Is the S&P a tech play?

Post by Northern Flicker »

Gaston wrote: Tue Jun 22, 2021 6:59 pm
Northern Flicker wrote: Tue Jun 22, 2021 3:34 pm One of the motivations of global diversification is to be better aligned with global GDP.
I hadn’t thought of that, but I see your point. If other countries have a proportionally greater mix of auto manufacturers, confectioners, or whatever, then global diversification might provide a different industry tilt than the S&P 500, or even the entire US market.
Yes. For instance, the tech sector is about 22.5% of VTI and about 12.5% of VXUS.
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Forester
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Re: Is the S&P a tech play?

Post by Forester »

Gaston wrote: Tue Jun 22, 2021 3:16 pm
What do you think?
I kind of agree, and we see the same kind of herding in mature markets in 2000 & 2008 (Dotcom, financials/EM). You can avoid this by owning global funds and diversifying into a smallcap (or SCV) index, these are also shorter duration assets at lower price multiples and are an inflation hedge of sorts.
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