Did you know the 5 biggest stocks in the S&P 500 accounting for 22% of the index offer investors an average dividend yield of 0.44%? Only two of the five even pay a dividend. S&P puts them in different buckets, but all five are technology businesses.
To meet the SEC’s diversification definition, a fund cannot hold more than 5% of its assets in any one issuer. The two largest stocks in the S&P 500 now account for more than 5% of the index. The index doesn’t even qualify as a diversified fund according to the SEC’s definition.
Does that sound like a benchmark anybody in or nearing retirement should pay attention to?
Is it even proper to call a position in an S&P 500 tracking ETF an investment?
In How ETFs Swallowed the Stock Market, the WSJ reports that the largest index ETF in the U.S. trading over $20 billion per day turns over its shares once every 12 days. In other words, the average holding period of the SPDR S&P 500 Index ETF is just 12 days.
The tail is clearly wagging the dog here.
How does one invest for dividends that are paid quarterly when he turns over his portfolio every 12 days?
Benchmark comparisons have never been a good use of time for the individual investor, but the concentration, lack of dividends, and rapid-fire trading of the index-based ETF complex have made them even less relevant to investors today.
As always, focus on your goals, your objectives, and most importantly your risk tolerance.
The Journal’s James Mackintosh writes:
Indexes began as a way for journalists to cut through individual stock prices to see how the market was doing. Charles Dow, as well as founding The Wall Street Journal, came up with the first indexes; other papers including Nikkei and the Financial Times followed with their own indexes.
Clients began to compare the performance of their investment managers to the indexes, and eventually funds adopted indexes as benchmarks. The next step was to invest as closely as possible to the index instead of paying a manager to choose stocks, with the first index fund set up in 1972.
ETFs represent the logical next step. Instead of trading stocks, trade indexes. There are indexes for everything; no one knows exactly how many, but it is certainly in the millions. If you want to bet on rising demand for safe assets, buy the utility ETF and short SPY or QQQ. If you think banks will do well, but can’t be bothered to examine the footnotes of J.P. Morgan’s latest 10-Q filing, trade XLF, the S&P 500 financial sector ETF. Everyone else seems to: Trading in XLF was higher than any bank or insurer except Bank of America last year.
In one sense this gives the lie to the idea that indexed investing is “passive.” As Tim Edwards of the index investment strategy team at S&P Global says: “The users of index-based products are more active than they’re presented to be.”
Whether this financialization of indexes bothers you depends both on how you think stock prices are set and how concerned you are about other people’s gambling.
Read more here.