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Apple and the Index

Apple (Nasdaq: 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 (Nasdaq: CSCO  ) , Intel, Microsoft (NYSE: MSFT  ) , and General Electric (NYSE: 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 (NYSE: 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) Nestle 25%
FTSE MIB (Italy) ENI SpA 21%
KOSPI (Korea) Samsung 16%
Hang Seng (Hong Kong) HSBC 15%
CAC (France) Total SA 14%
BOVESPA (Brazil) Vale 11%
Shanghai (China) Petro China 10%
DAX (Germany) Siemens 9%
Nikkei 225 (Japan) Fast Retailing 7%
FTSE 100 (U.K.) HSBC 6%
Euro Stoxx 50 (Europe) Total SA 6%
S&P 500 Apple 4%

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.

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.

Read/Post Comments (5) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 10, 2012, at 11:07 AM, 1984macman wrote:

    Thanks for the refreshingly objective point of view. I fully expect this aspect of Apple's correction (back to a more sensible and much higher valuation) to be the subject of conversation for years to come. It'll be nice to have a reference like this as a sanity check for when things get REALLY crazy!

  • Report this Comment On April 10, 2012, at 11:56 AM, melegross wrote:

    It's just interesting to see how these funds are not logically invested. You can see that most all have their biggest investment in a company from the same country as the fund is located in. Where that isn't true, it's from the same trade association.

    None of the funds listed come from the USA, so it's biased as well.

  • Report this Comment On April 10, 2012, at 1:14 PM, slpmn wrote:

    To heck with Apple, what's this "Fast Retailing" creature that makes up 7% of the Nikkei?

  • Report this Comment On April 10, 2012, at 3:30 PM, Merton123 wrote:

    The 10 largest Holdings of Vanguard Total World Stock Idx (VTWSX) comprise 7.8% of the total holdings. Theoretically from an indexing perspective this is the best index to own.

    The S&P 500 index fund is an index of only American Stocks. The other examples that Morgan gives are other individual countries stock indexes where even fewer companies dominate the index.

    Morgan makes a good point that moving forward for people who buying into the indexing method of investing that they should sell S&P 500 index and move into the Total World Index. I suspect that for people with large holdings in S&P 500 (like myself) that the relative performance between these two indexes should be comparable. The Total World Index should have a smaller standard deviation (volatility).

  • Report this Comment On April 17, 2012, at 8:42 PM, buffetlunch wrote:

    The APPL hiccup was useful; but what exactly caused it?


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