Are US Indexes Overweight?

Ever since the COVID Pandemic hit the mainstream news cycle in 2020, I’ve noticed that many of the stocks which I follow seem to dwindle, while the major indexes continue to accelerate upward. I decided to do a bit of research on this subject, and the following is what I discovered along the way.

The Case of the NASDAQ Composite

The NASDAQ Composite is comprised of 3,279 separate equities, each possessing a differing weight as it pertains to their overall contribution to the index’s price. The top 5 equities by weight are:

In sum, 5 equities, and their corresponding evaluations, contribute to approximately 34.07% of the NASDAQ Composite's overall price. 

Over the past five years, the NASDAQ has experienced a hefty appreciation of 67.43%.

However, of this 67.43% evaluation upward, how much of the price shift can be attributed to the top 5 weighted equities from which the index is comprised?

If every other component within the NASDAQ traded completely flat throughout the duration of the previous 5 years, the Dow Jones Industrial Average would have increased in value by approximately 25.51%. As the index appreciated by 67.43%, we can conclude that some of the other components from which the index is comprised, immensely increased the overall potential aggregate (67.43 > 25.51).

Rating: HEFTYCHONK

If 5 companies make up 34.07% of the index’s weight, and 0.15% of the index has increased by approximately 22.51%, while the index itself has appreciated by 67.43%, we can evaluate this furry boi as a Heftychonk.

The Case of the Dow Jones Industrial Average

The Dow Jones Industrial Average is comprised of 30 separate equities, each possessing a differing weight as it pertains to their overall contribution to the index’s price. The top 10 equities by weight are:

In sum, 5 equities, and their corresponding evaluations, contribute approximately 33.38% of the Dow Jones Industrial Average’s overall price.

Over the past five years, the Dow Jones Industrial Average has experienced a healthy appreciation of 32.40%.

However, of this 32.40% evaluation upward, how much of this price shift can be attributed to the top 5 weighted equities?

If every other component within the Dow Jones Industrial Average traded completely flat throughout the duration of the previous 5 years, the Dow Jones Industrial Average would have increased in value by approximately 30.97%. As the index appreciated by 32.40%, we can conclude that some of the components from which the index is comprised, slightly increased the overall potential aggregate (32.40 > 30.97).

Rating: MEGACHONKER

If 5 companies make up 33.82% of the index’s weight, and 16.67% of the index has increased by approximately 30.97%, while the index itself has appreciated by 32.40%, we can evaluate this plump feline as being a MeGaChOnKeR.

The Case of the S&P

The S&P 500 is comprised of 503 separate equities, each possessing a differing weight as it pertains to their overall contribution to the index’s price. The top 10 equities by weight are as follows:

In sum, these 10 equities, and their corresponding evaluations, contribute approximately 30.29% of the S&P 500’s overall price.

Over the past five years, the S&P has experienced a robust appreciation of 52.92%.

However, of this 52.91% evaluation upward, how much of the price shift be attributed to the top 10 weighted equities from which the index is comprised?

If every other component within the S&P traded completely flat throughout the duration of the previous 5 years, the S&P index would have increased in value by approximately 57.35%. As the index appreciated by 52.92%, we can conclude that some of the components from which the index is comprised, actually reduced the overall potential aggregate (52.92 < 57.35).

Rating: OH LAWD HE COMIN

If 10 companies make up 30.29% of the index’s weight, and that 1.98% of the index has increased by approximately 57.35%, while the index itself has appreciated by 52.92%, we can evaluate this rotund hunk of a cat with the phrase, “OH LAWD HE COMIN”!

Conclusion

While every index has been disproportionately impacted by the performance of a few equities, it would appear that the NASDAQ, the index which is least top heavy and possesses the greatest number of companies, has appreciated far more in value than its contemporaries.

Maybe the NASDAQ, though often more volatile than other indexes, benefits from two conflicting attributes. The top 5 stocks within the index anchor the overall price of the index by the magnitude of their market cap, while the much smaller corporate equities, are directionally pressured by component proximity.

Like almost every other medium of existence, it would seem that titans emerge after a certain period of growth. To succeed in such circumstances one must either cast their lot with familiar titans, or learn to swim amongst them.

-RD