Apple and the Index
Apple (NAS: AAPL) is huge. Its products are now in half of American households. It has more cash than the GDP of several nations. With a market cap of nearly $600 billion, it's by far the largest company in America.
And Apple now makes up more than 4% of the S&P 500. That skews the index in all kinds of ways. Consider these recent headlines and snippets:
- "S&P Earnings Growth Without Apple: 0%"
- "Apple to skew results; turns tech sector profit expectations from 0.7% drop to 6.9% gain"
- "Apple drives 15% of S&P Q1 gains"
- "S&P 500's Q1 2012 earnings were on track to rise 6.8 per cent with Apple, but would decline to 2.8 per cent without"
All of these are true, as far as I can tell. But how relevant are they?
Not very. If anything, they highlight the benefit of a stock index: It holds a lot of companies, capturing the gains of both the good and the bad. Those who didn't want to spend time picking stocks and instead owned an index like the S&P 500 have enjoyed Apple's success without knowing anything about it. That's the point of an index. If you exclude Apple but also exclude telecoms and materials, S&P earnings growth has been strong over the last year. If you ignore financials, 2008 wasn't that horrific a year. None of these examples are terribly relevant. The point of an index is to own -- and account for -- everything.
And sometimes the single-company skews work in the other direction. In the fourth quarter of 2008, the S&P 500 reported earnings of negative $23.25, $7.10 of which was caused by AIG. The S&P 500 had a lost decade from 2000 to 2010 in no small part because it was heavily weighted early in the decade in four companies -- Cisco (NAS: CSCO) , Intel, Microsoft (NYS: MSFT) , and General Electric (NYS: GE) -- all of which plunged from their dot-com bubble heights (a version of the index that holds all 500 companies in equal amounts is up nearly 90% since 2000). In 1998, Microsoft was responsible for 8.5% of the S&P's returns. GE, Wal-Mart (NYS: WMT) , and Lucent combined accounted for another 13% of returns. Big skews are nothing new, in other words.
Nor is Apple's 4% weighting in the S&P large compared with other global indexes. Last week, JPMorgan analyst Thomas Lee published a report showing the weight of the largest holding of various global indexes. Apple is at the bottom of the pack:
Weighting of Largest Holding
|FTSE MIB (Italy)||ENI SpA||21%|
|Hang Seng (Hong Kong)||HSBC||15%|
|CAC (France)||Total SA||14%|
|Shanghai (China)||Petro China||10%|
|Nikkei 225 (Japan)||Fast Retailing||7%|
|FTSE 100 (U.K.)||HSBC||6%|
|Euro Stoxx 50 (Europe)||Total SA||6%|
Source: Thomas Lee, JPMorgan.
Some of the most popular U.S. mutual funds have similar skews. The Vanguard Total Stock Market Fund -- one of the broadest funds in the world -- holds 3,319 companies, but 10 make up nearly 17% of the total.
These skews might be surprising to investors who buy an index fund wishing to spread out their bets as widely as possible. But global corporations are a lot like American households: Most of the wealth is concentrated in a small number of hands. Any index that tries to capture a snapshot of an economy is going to be skewed by default. Apple's current weighting in the S&P is no different.
At the time this article was published Fool contributor Morgan Housel owns shares of Microsoft, Intel, Vanguard Total Stock Market, and Wal-Mart. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Apple, Wal-Mart Stores, Microsoft, and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft and Apple, and have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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