Imagine the S&P 500 was a ship that you were taking across the ocean.
Massive ships have several engines to help thrust the ship through the water.
For the sake of this example, we’re going to imagine this ship has 500 engines to represent the S&P 500 (which actually has 504 companies interestingly enough).
On a normal ship, you might expect all 500 engines to put out the same power and play the same role, in case one engine went down there would not be a risk of catastrophe.
That is not the same with the S&P 500.
This week, Ed Butowsky will be walking you through how the S&P 500 holdings actually work. They do not account equally for the 500, but large companies contribute much more than smaller companies.
In fact, the Magnificent 7 combine to make up nearly 30% of the S&P 500.
If these 7 companies were to return to their earlier valuations in 2022, this would bring the entire index down about 10%.
All of this to say, you need to know how the engine works.
Watch today’s video with Ed to learn more.
Summary:
- The S&P 500 has 11 different sectors each containing companies that contribute to the performance of the index.
- Sectors such as consumer discretionary and communication services are some of the most volatile within the S&P but are also the biggest contributors or “most powerful engines” to use the earlier example.
- Because of this lopsided contribution style, one’s portfolio could be very risky if the top 7 companies were to all go down at once, which happens quite often when looking at historical 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.
Disclosure:
Chapwood Investments, LLC is a SEC Registered Investment Advisory Firm. No mention of a particular security, index, derivative or other instruments in this material constitutes an opinion on suitability of any security. The information and data in this material were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this material. The guests appearing in material do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.