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Fund launches often act as a rearview mirror, showing larger market trends that have already taken hold. The key question is whether such trends will continue and how big of a deal it is to bet on it.
This reminds me of a recently launched exchange-traded fund. The iShares S&P 500 Top 20 ETF, as its name suggests, focuses on the 20 largest companies in the U.S. market and should benefit investors who expect the largest constituents to maintain their dominance.
There is certainly some basis for this. We're all familiar with the amazing profits of the Magnificent Seven, but even if you scale this up to the 20 largest companies, you still get an impressive bunch. IShares notes that the top 20 companies have contributed to more than two-thirds of the S&P 500's returns over the past three years.
The fund itself has an understandably focused approach, with Apple and Nvidia each accounting for 15% of assets, Microsoft at nearly 14%, Amazon at 8.3%, and Meta at 5.3%.
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This ETF rebalances on a quarterly basis. This will force you to take profits on your position if, for example, NVIDIA stock goes up wildly again. For those who don't know what other stocks are in the top 20 besides the Magnificent Seven, they include Berkshire Hathaway, Eli Lilly, UnitedHealth Group, and ExxonMobil.
The market currently looks unbalanced, with the S&P's biggest players fighting for the lead. There are many ways to respond to that. Equal-weighted S&P 500 funds are growing in popularity, and earlier this year a fully US-exclusive fund, the XTrackers MSCI World exUSA ETF, was launched in the UK.
What do you think about S&P 500 Top 20 options? If owning a traditional S&P 500 tracker seems like too much diversification, it's a happy medium between owning only a few of the biggest stocks in the US market. could function as a punchy satellite holding.
It is worth noting that several similar options exist. For example, the iShares S&P 500 Information Technology Sector ETF has huge allocations to Apple, Nvidia, and Microsoft. The Nasdaq 100 fund also has a good weight in tech giants, but is somewhat diversified by sector.
Apart from that, I'm also concerned about how volatile the new fund will be and how exposed it may be to falling stock prices. This probably comes down to the question of risk and how much investors are willing to bet on the sustained dominance of just a few stocks.
While the opportunity cost of missing out on a large-cap-led bull market may be high, it's worth reiterating that a broader approach can reap commensurate returns.
For example, the Invesco S&P 500 Equal Weight ETF has an impressive total return of 17.3% year to date in 2024, which is less than the roughly 26% return of the traditional S&P 500 tracker, but still impressive in its own right. is.
It is also important to consider the downside. The Equal Weight fund lost just 0.7% in the 2022 bear market, compared to a typical S&P 500 fund's loss of 8.1%.
*Investors Chronicle provides a professional and independent view of the UK investment market. If you would like to learn more, please visit: investorchronicle.co.uk
