One of our customers at EDGE calculated that 82% of Demand in the S&P 500 is from three stocks (NVDA – now the largest – AAPL, MSFT). Ramifications?

Reminds me of what the former head of investor relations at United Health Group, John Penshorn, said years ago.  Paraphrasing, he observed that at some point the stock market would become one giant company owned by one Exchange Traded Fund.

In effect it’s happened. SPY, the S&P 500 ETF, is the stock market, and its largest component driving most of the demand and much of the index’s gains is NVDA.

Is that bad? Or good?

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Photo 105330423 | One Fund © Ppy2010ha |

From an investment standpoint, owning the S&P 500 is supposed to be a diversification strategy. If you’re functionally buying one stock, or three, you’re not diversified, though it’s undeniable that you own the index.

Of course, the moment everyone starts selling NVDA, the market will rupture.

Perhaps more important to understand is why the big keep getting bigger.  There’s $18 trillion of market cap in the eight largest stocks (NVDA, AAPL, MSFT, GOOG, GOOGL, AMZN, META, TSM). There are a hundred thirteen stocks currently with market cap over $100 billion. They contribute $42 trillion of market cap to the present total near $54 trillion, or about 77%.

A hundred stocks are 77% of the market?  Yup.  The S&P 500 is 88% of it. 

There is no point or purpose for this group of large companies to be telling a story to investors.  The money is buying them because they are large, liquid and reflective of “the benchmark,” be it the S&P 500 or something else.

They are the market. 

And the money wants “the market,” not the outliers.  I’ve written extensively about this fact.  The greatest modern disconnect between form and function is the quarterly earnings call and how money is being deployed in equities.

You’d think it would create opportunity for overlooked stocks – those outside the biggest, the S&P 500 – to find some love.  They’re always talking about it on CNBC.  Something like this:

“What we need to see is greater breadth.”  “The market needs to broaden out as a signal of the durability of this rally.”  “The separation between large caps and the rest of the market really creates opportunity in small-caps and mid-caps.”

Things like that. 

But it doesn’t happen.

The market doesn’t broaden out.  Some of the talking heads were talking about it the last couple days.  The market is rising on a handful of stocks and the rally is not broadening out. In fact, it’s more reliant than ever on the few.

I was giving feedback to a couple small-caps on why they are down 40-45% since before the Pandemic. Set aside REASONS and just consider the composition of volume. MONEY drives shareholder value. Period. Not reasons we postulate.

One of them, down 42%, has seen Active Investment decline 27%, and shorting rise 24%. So, if they could just…get that Active trend to reverse? Redo the investor deck? Target more effectively? 


Active money is declining everywhere in the market.  Except in SPY.  More Active money buys SPY now than it did in 2019.  So stock-pickers are buying an ETF to mimic the market rather than picking stocks. 

Can they do that?  Well, yes.  They need to follow the fund prospectus.  But they can substitute 10% of assets for something else substantially similar.

And that company with shares down 42%? They should appeal to Passive money too, even though the market doesn’t broaden out. You’ll jump the cue for your category (want to know more? Ask us.)

Because nearly all the largest 25 funds in the market are passively managed equity and bond funds, led by the Vanguard Total Stock Market Index Fund, with about $1.6 trillion under management. In a single fund!  About 25% of assets are in NVDA, MSFT, AAPL, GOOG/L, META, AMZN.

Compare to the largest Active mutual fund, the Growth Fund of America from American Funds. Assets, about $270 billion. What does it own?  MSFT, NVDA, AAPL, GOOG/L, META, AMZN, and also BRK.B, LLY, AVGO. 

Except it costs 0.63%, where VTSAX, Vanguard’s total stock market index fund, has a cost basis of 0.04%.

I’ve said you can buy beta for six basis points.  I’m wrong. It’s four.

Tim, what are you saying? 

That everybody owns the same stuff. It’s like the stock market has become one fund. Even if the names of the funds are different – or actively managed, or passively managed.  Yes, there are exceptions WAY down the ranks, but they can’t move the needle on shareholder-value. 

What should be clear to investors is this: Buy the cheapest version of beta. It’ll boost your performance. And indeed investors have figured it out.  Look at the assets!

Only one audience hasn’t: Public companies.  Why are companies speaking to the wind with earnings releases?  That audience is gone.  The money is in models. 

If you haven’t rethought the earnings cycle for a market crushed by Passive money, you’re doing investor-relations like a caveman.  Yet the good news – and I hope Geico won’t sue me – is it’s so simple even a caveman can rethink it.  You just need data, strategy, process, method.

And we have those.

And there are your ramifications. Everybody owns the same stuff, so owning it gets cheaper, and the stuff gets bigger. And public companies, this market isn’t helping you differentiate, so don’t. Rethink what you’re purveying to it. 

Ask us for help.  We’ve got this sorted out.

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