What metrics can investors use to understand how the overall market is doing when a small number of companies are really outperforming? Portfolio Manager Charlie Toole explained why he looks at equally weighted market indexes in our recent webinar,* Looking Beyond the Election to the Recovery’s Future.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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We’ve had a handful of tech stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. that have performed very well this year. To really gauge how the overall market is doing, I would suggest looking at what’s called an equally weighted index. So, the S&P 500 has what’s called a “market capitalization weighting.” That means that the larger stocks make up a larger portion of the index.
Apple, Microsoft, Amazon, Facebook and Google—those top five stocks represent nearly 25% of the S&P 500. When those stocks perform well, like they have this year, they can really drive the returns of the overall market.
On the other hand, when you look at an equally weighted index that weights all the stocks the same throughout the index, you can get a better sense of the overall market. So, instead of Apple having a 6.5% weight in the S&P 500, it has just a 0.2% weight in the equally weighted S&P 500. So, its performance will drive the market the same as all the other stocks.
So far this year, updated as of today’s not-so-great day [October 28, 2020], the equally weighted index is down about 6.5%, while the traditional S&P 500 is up nearly 3%. This tells us that the average stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. or the larger stocks in the S&P 500 are performing better than the smaller ones. I think the equally weighted index is the best way to gauge how the overall market is doing.
*Webinar recorded after the market closed on Wednesday, October 28, 2020.
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