Don’t Let Big Tech Ruin You
By Roger Nusbaum, AdvisorShares ETF Strategist
Over the weekend, Barron’s wrote Tech Stocks’ Dominance Poses Risk for Investors. There were a couple of points in there to explore a little further. To the article’s title and first point, technology grew to 25% of the S&P 500 Index. Since the start of my blogging in 2004 I have been writing about how crucial it is to keep an eye on sector weightings with precedence including energy which grew to 30% in the early 1980’s, tech which grew to 30% in 2000 and financials to 23% before the financial crisis. I view 30% as flashing red light to underweight and 20% as more of a flashing yellow light; be very cautious.
The article quotes advisor Dan Wiener as not being a fan of indexing because later in the cycle, the broad indexes end up being dominated by whatever has been hot. A look at the S&P 500’s constituency indeed corroborates the assertion, as of last Friday the three largest tech holdings in the S&P 500 accounted for 8.6% of the index. Barron’s notes the tendency of fund managers to end up even heavier than the benchmarks in the dominant sectors which often translates into investors having too much in the sector that ends up leading the decline, we saw in the previous two bear markets.
There was one sentence that made me laugh out loud; “Passive investors who want to avoid the overconcentration risk from cap-weighted indexes can buy funds that own equal proportions of each stock in an index …” The idea may be perfectly valid but it is clear to me that the person who decides to switch to an index fund that uses an alternative weighting process is not a passive investor, they are making a very active decision, using what might be a passive vehicle to do it.
I’ve been saying for a long time that the active/passive debate has become the wrong thing to look at, it isn’t even a thing. My take has been that what “passive” investors really are is users of passive funds and not very active. Rebalancing is an active decision. What threshold causes you the passive investor to rebalance? No matter the answer it is an active decision. What is your asset allocation? That is an active decision. Leave the labels behind, use whatever you think are the best vehicles for the exposures you want and when possible, use a less expensive option where there is more than one choice for an identical exposure.
If you do that and leave the dogma to other folks, you will probably end up with a mix of passive funds, active funds and a few individual issues.
Back to the first issue cited by Barron’s of ending up with too much in the hot sector, you want to avoid finding out you had too much before something bad happens. Fortunately, this can be easy to do, it’s simple spreadsheet work. It can be even easier if you use ETFs, the holdings are current with just a one-day lag, except for Vanguard. If your equity portfolio consists of an S&P 500 index fund as your core holding, with satellite exposures in social media, blockchain and robotics you’re going to be much heavier than the S&P 500 in tech. This can be figured out in about ten minutes, then you just need to figure whether you want to do anything about this overweight position and finally take action if you conclude that’s appropriate.
It is totally unnecessary in this day and age to learn after the fact that you had too much in the hot sector that then blew up.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.