Over 60% of Americans are investing in the stock market, marking the highest participation rate since 2008, when the economy faced a significant downturn. As you may have guessed, many are in the S&P 500.
A substantial portion of these investors, now more than ever, are putting their money into index funds, with over 10 trillion dollars currently invested in index funds alone.
Among these options, indexes like the S&P 500 are particularly popular. But what many might not realize are the inherent risks associated with this type of investment.
The S&P 500 is uniquely structured as a market-capitalization-weighted index. This means that the influence of each company on the index’s overall performance is directly proportional to its total market value — calculated as the share price times the total number of outstanding shares.
Consequently, larger companies have a much greater impact on the index’s movements than smaller ones.
In this video, Ed Butowsky will explain what this market-cap weighting means for your investments and the risk that comes with it. Using specific examples, he’ll help you understand the potential risks and considerations of putting your money into the S&P 500.
Summary:
- NVIDIA’s Significant Impact: NVIDIA has surged by 74%, significantly influencing the S&P 500. In fact, 37% of the S&P 500’s year-to-date return of 6.04% is attributable to NVIDIA’s performance.
- Amazon’s Role in the S&P 500: Amazon also plays a substantial role in shaping the S&P 500, accounting for 8.3% of its movement.
- Comparison with the Dow Jones Industrial Average: The Dow Jones Industrial Average, which is up only 1%, presents a stark contrast. This difference is largely due to the way the Dow “scores” its returns, using a price-weighted system rather than market-cap weighting like the S&P 500, making the Dow a more accurate reflection of the broader market’s performance.
Thank you for reading this week’s “Making Sense with Ed Butowsky” article. To view the rest of Ed’s articles, you can click here or you can also check out Ed’s personal website to learn more about him.
For more information, email Jordan McFarland at jordan@chapwoodinvestments.com.
Disclosures: Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.