Below is a diagram from Ritholtz Wealth Management that shows the top five companies by market value of the Standard and Poor’s 500 Index and compares them to the smallest 282 companies of the same Index.
This may seem like a big concentration among a small number of companies, but MarketWatch reported that in 1965 two companies, AT&T and GM accounted for almost 15% of the Index.
Why is this happening? Well, these five companies are very successful at what they do, their revenues and earnings are growing rapidly, and they are in industries that, at least now, seem to have an unlimited future.
There may be another reason as to why these companies are seeing their share prices rise so rapidly. Since 2009, we have seen an extremely big increase in the amount of money flowing into funds that follow a market index. The industry calls this passive investing, meaning there is no active management to make decisions as to what stocks to buy or sell. Naturally, since there is no active management of the funds, it is cheaper than the typical actively managed fund. It is also, in a way, a momentum strategy in that the more money that flows into this strategy, the more the large holdings go up in value. The more the index goes up in value, the more money is attracted to it.
We actually used a lot of this strategy in the mid-1990’s. It works very well…until it doesn’t.
