Mega-Cap Stocks Dominate Wall Street

One important point about the stock market that I think many investors don’t fully appreciate is how skewed the market is toward very large stocks. Simply put, Wall Street is comprised of a small amount of gigantic companies, and thousands of much smaller ones. The gap is dramatic.

Bespoke Investment Group recently pointed out that the 49 largest stocks in the S&P 500 make up half its value. That’s about right in the long-term average. That’s pretty stunning once you think about it. You only need to own one-tenth of the stocks to get half the index. The other 90% make up the other half.

According to Russell Investments, the Russell 200 represents 64% of the U.S. market while the Russell 1000 represents 92%. Even within the big boys, the largest dominate. The top 50 stocks in the Russell 3000 make up 40% of its value. To closely mimic the market an investor can own a very small number of stocks.

According to S&P, the current S&P 100 is worth $8.84 trillion and the S&P 500 is worth $12.59 trillion. So the top 20% account for 70% of the value.

The Wilshire 5000 Total Market Index closed yesterday at 14,781.65. That number is supposed to be an approximation of total U.S. market cap in billions. In other words, the U.S. market is roughly $14.78 trillion. Adding that on to the S&P data, it means that thousands of companies are no more than a rounding error.

Even on our Buy List, which is pretty well diversified, the large stocks would dominate any cap weighting. Oracle ($ORCL), JPMorgan ($JPM) and Johnson & Johnson ($JNJ) would make up about two-thirds of our Buy List if it were cap-weighted. The other 17 would make up the remaining one-third. Please note that I DO NOT favor cap weighting. At the beginning of the year, I assume that each position on the Buy List is equally weighted.

One takeaway for investors is that a big secret on Wall Street is how easy it is for someone to be a closet indexer. I can easily construct a small portfolio that closely follows the market without appearing to. A few years ago, I found that a three-stock index fund of DuPont, Disney and United Technologies had an 85.4% correlation with the daily movements of the S&P 500. If we added five more stocks (Walmart, ExxonMobil, American Express, Verizon and IBM), the daily correlation rose to 95%.

Posted by on December 4th, 2012 at 1:02 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.