After terrific up years in 2020 and 2021, we’ve got a serious downer start to the year, with the S&P 500 index down 8.6 percent as of Tuesday’s close and the overall market down enough to offset more than half of last year’s record $9.5 trillion gain.
It may not seem surprising that a handful of huge companies have an oversized impact on the S&P, but even I didn’t realize the full extent of that impact until I got some numbers from Vanguard.
And even if you don’t have investments in any of these individual companies, if you own index funds tied to the S&P 500 or the total U.S. stock market, you’ve got a significant portion of your money tied up in these companies, too.
Apple, Microsoft, Amazon, Alphabet (formerly Google), Meta (formerly Facebook), Tesla and Nvidia — or the Select Seven as I call them — helped spur the S&P 500 to record highs in 2020 and 2021.
And so far this year, these same companies are helping drag the overall market down.
These companies’ eight stocks — one of the companies, Alphabet, has two share classes — also have a huge influence on popular index funds that may be in your retirement account.
Let’s take one of the most popular index funds, Vanguard’s S&P 500 fund.
The seven companies accounted for just under a third of the 28.6 percent return put up last year by the Admiral shares of the Vanguard fund, based on calculations provided by Vanguard. (By “return,” I mean price increases plus reinvested dividends.)
Three companies — Apple, Microsoft and Alphabet — accounted for almost 24 percent of that return. A fourth company, Nvidia, accounted for another 4.2 percent. That’s substantially above their total weight of about 19 percent in the index as of year-end.
Tesla, Meta and Amazon (founded by Jeff Bezos, owner of The Washington Post) — accounted for a bit under 5 percent of the S&P’s return.
When you add everything up, the seven companies had a total weight of 26.7 percent in the S&P and accounted for just under a third of the 2021 return owners of Vanguard’s Admiral index fund shares earned last year.
(Take a look at the table below, compiled using numbers from Vanguard).
Company performances in 2021 | Contribution to S&P’s return | Share of S&P’s return |
|---|---|---|
Apple | 1.85 | 6.5 |
Microsoft | 2.72 | 9.5 |
Amazon | 0.10 | 0.3 |
Alphabet | 2.26 | 7.9 |
Meta | 0.50 | 1.7 |
Tesla | 0.79 | 2.8 |
Nvidia | 1.19 | 4.2 |
Total | 9.41 | 32.9 |
That’s big, to be sure. But on a proportionate basis, it’s much less than in 2020.
In 2020, the Select Seven, which had a combined weight of 24.5 percent at year-end, accounted for more than two-thirds of the Vanguard fund’s return of 18.4 percent. (You can see this in the table below, compiled using numbers from Vanguard).
One of the big differences between the Seven’s huge share of the S&P return in 2020 and its smaller (but still above its weight) share last year involves Amazon.
Amazon had a great year in 2020, returning 71 percent to its investors and accounting for 15.8 percent of the S&P fund’s return. But in 2021, Amazon gained just 2.4 percent, accounting for a minuscule 0.3 percent of the fund’s total return.
Company performance in 2020 | Contribution to S&P’s return | Share of S&P’s return |
|---|---|---|
Apple | 4.10 | 22.3 |
Microsoft | 2.57 | 14.0 |
Amazon | 2.90 | 15.8 |
Alphabet | 1.05 | 5.7 |
Meta | 0.82 | 4.5 |
Tesla | 0.14 | 0.4 |
Nvidia | 0.88 | 4.8 |
Total | 12.46 | 67.5 |
So far this year, each of the Seven has fallen more than the S&P, which was down 8.6 percent through Tuesday. (Those are my calculations, based on numbers from Yahoo Finance.) Each has also fallen by more than the 9 percent decline in Vanguard’s total stock market fund.
The biggest percentage loser, Nvidia, was down 24 percent, after having more than doubled in both 2020 and 2021. Another example of why a big index fund has a lot less upside than an individual stock, but a lot less downside. (Losses of the other six ranged from 10 percent for Meta to 16 percent for Amazon).
Given the Seven’s substantial weight in the S&P — and given that each of the Seven has fallen more this month than the S&P — it’s clear that the Seven have dragged the S&P down disproportionately. Just as they helped it rise disproportionately in the past two years.
About $13.5 trillion was indexed or benchmarked to the S&P as of year-end, according to S&P Dow Jones Indices. That’s roughly a quarter of the value of the U.S. market (by my estimate).
The bottom line: An S&P index fund is far less risky than owning individual stocks. But remember, please, that more than a quarter of your S&P 500 money is tied to the Select Seven stocks. Which gives you a substantial stake in them, whether you realize it or not.
Disclosure: The only member of the Select Seven that I own is Apple, so I can give shares to each of my four grandkids on their birthdays. I consider my Apple holdings to be my grandkids’ stock, not mine.