John Bogle is famous for low-cost index fund investing.
His concept was simple – most of us can’t beat the market picking stocks so why try?
Instead, drive down costs and give someone a product that mirrors a given market.
Today, most financial advisors pare themselves down to the big for:
- Dow Jones Industrial Average
- S&P 500
- Russell 2000
- Nasdaq 100
The most popular in each category are the DIA, SPY, IWM, and QQQ respectively.
But let me ask you a simple question…
How much overlap do these indexes have?
Most of us intuitively know there are similar stocks in each, but not the weights nor the scope.
Here’s a good example.
Below are the top 5 holdings and weights for the SPY and QQQ. See if you can guess which is which without peaking.
Not as easy as you thought is it?
In one index, the top 5 companies make up nearly 20% of the total while they make up 37% of the other’s total.
But is there any overlap with the Russell 2000?
Nope.
The Russell 2000 measures small-cap stocks while the S&P 500 and Nasdaq 100 focus on large-cap companies.
What about the Dow Jones?
It overlaps more with the S&P 500 than it does with the Nasdaq 100, but not a ton.
Why bring this up at all?
Because recently, the search patterns for institutional advisors changed.
Typically, the SPY dominates the searches each week.
But the last few weeks have been different.
We saw a shift several weeks ago away from the SPY and towards small caps and then technology.
Here’s what’s unusual about this movement.
The QQQ has outperformed on a relative basis recently, being the first to make new all-time highs.
Afterward, the SPY followed along.
But the IWM has been notably weaker, still under its all-time highs.
Small caps perform well when there is broad-based economic growth. Yet, we aren’t quite there yet.
This could be a signal funds are starting to reach for yield, stuffing their money into the ‘catch-up’ trade.
But that would be dangerous given we’re ending the first half as well as few fundamental reasons to support such a move.
Our hot take
We’ve seen a see-saw effect between small caps and tech the last few weeks. As tech outperformed, this more than likely suggests another rotation.
It’s worth keeping an eye on as we head into the second half of the year.
Questions from your clients
- What’s the difference between equal-weighting ETFs and standard index funds?
- Should I look at rebalancing my portfolio mid-year?
- Do emerging markets have room to catch up?
- What will inflation do to my holdings in the next six months?