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
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.