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As sung through the velvety pipes of Napoleon Dynamite’s Kip, “I love technology, but not as much as you, you see.”
Big stock-market indexes (and a lot of large cap ETFs) may soon become even more concentrated in the tech sector than they already are, and more than many investors would prefer. With SpaceX reportedly filing for its initial public offering, another big name will eventually be added to the S&P 500 and other indexes. At a potential $2 trillion valuation target, it could be the sixth-biggest US public company by market cap. And future IPOs for companies like Anthropic and OpenAI will compound that, making a case for investors to further diversify their portfolios or risk increasingly high weightings in tech and artificial intelligence.
“If the [SpaceX] IPO goes through, you’re going to have a lot of ETFs and mutual funds that, because it’s now a publicly traded company, are going to have to buy it,” said Daniel Sotiroff, senior manager research analyst for Morningstar. “There is going to be a lot of buying pressure.”
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That will undoubtedly notch up the tech and AI concentration in big market indexes, and possibly sooner than expected. Standard & Poor’s is reportedly considering a rule change that would fast-track newly public companies’ inclusion in the S&P 500, shortening the timeframe from the existing 12-month period, for example. But where SpaceX and other likely IPO companies end up on the index is a question. “A lot of indexes these days do adjust for float,” Sotiroff said. “They’re only counting the shares that are floated publicly.”
A look at the top-heavy nature of the S&P 500:
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Over 40% of the index was in the top 10 companies by market capitalization last year, per RBC Wealth Management.
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That’s up from less than 29% in 2020 and just under 19% in 2015.
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Historically, the biggest 10 companies represented a mix of industries, but the top 10 is increasingly tied to AI, and all the opportunities and risks that come with the rapidly evolving technology.
Already, the increasing levels of concentration have led to more equal-weight funds appearing on the scene, a way for investors to help diversify their exposure within US stocks. “If you look at the impact of the top 10 names in the S&P 500, their contribution to overall risk in the index has gotten very large,” said Nick Kalivas, head of factor and equity ETF strategy at Invesco, which recently launched its QQQ Equal Weight ETF. “They have become more individually volatile, given the big capex spending, some of the uncertainties that come with AI, and they all very much move in tandem together. There is an unusual level of risk.” SpaceX, despite being an aerospace and communications firm, is also heavily invested in the AI space, thanks to its acquisition earlier this year of Elon Musk’s xAI.
‘Just Listen to Your Heart. That’s What I Do.’ “The diversification premise that made passive index investing so compelling is quietly being hollowed out,” Occams Advisory CEO Anupam Satyasheel said in a statement. “Equal-weight strategies were once considered a niche rebalancing tool. Now they are increasingly looking like a structural necessity.” Still, an inherent issue with equal weight strategies is that companies with poor returns get the same allocations as star performers, said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s really a moment to be aware of what you’re investing in and why you’re invested in it.”
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