Is dominance of big tech in the S&P 500 a problem?

September 15, 2023

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I am seeing a lot of discussion regarding the concentration of big tech firms in the S&P 500, and whether or not that is an undue risk. This summer, the top seven tech firms made up 28% of the value. You can see a visualization here.

The concentration certainly has negative and positive effects on the business environment. You can throw societal effects into that mix as well. But the hand-wringing over the negative effects on the index is likely overdone, particularly in relation to your other options.

Burton Malkiel, a Princeton professor and a founder of the indexing movement, wrote this piece in the WSJ this week. It's very good, I suggest reading it this weekend.

Malkiel highlights the history of this "narrow market" argument, using the dot-com era as a backdrop. The worry around concentration was evident then. In hindsight, it was misplaced concern, as the S&P outperformed active managers over the twenty year period ending in 2009, a time frame that ended in the doldrums.

This thought from the article is important: The basic idea of efficient markets isn’t that prices are always correct. In fact, they are always wrong. What efficiency implies is that information is reflected in prices without delay.

The reason the market "is always wrong" is that everyone has their own methodology to corporate valuation. So if you and I value, say, Crocs, we're probably going to come up with different results. And the market value of Crocs is not going to reflect either of our conclusions, because the market is factoring in thousands, if not millions, of other opinions. It's interesting that something that "is always wrong" can outperform almost everyone over time. What a paradox.

Finally, note this paragraph: There is no way to predict which active managers will be the best stock pickers. Portfolio-manager fees are the only reliable predictor of performance. The lower the fees, the higher the returns realized by investors.

Dan Cunningham

^{1. Firms were ranked based on changes in client account totals and assets under management (AUM) between 2020 and 2023. Firms were only considered if they had at least $500 million in AUM, had no regulatory disclosures related to disciplinary action, and offered financial planning services. SmartAsset released the list on 9/6/2023.}