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:


Largest Holding

Weighting of Largest Holding

SMI (Switzerland)



FTSE MIB (Italy)



KOSPI (Korea)



Hang Seng (Hong Kong)



CAC (France)

Total SA


BOVESPA (Brazil)



Shanghai (China)

Petro China


DAX (Germany)



Nikkei 225 (Japan)

Fast Retailing


FTSE 100 (U.K.)



Euro Stoxx 50 (Europe)

Total SA


S&P 500



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 thisarticle was published Fool contributorMorgan Houselowns 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 thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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