Nvidia (NVDA +2.58%) became the first company to reach $4 trillion in market cap on Wednesday -- an incredible feat considering the company was worth a fraction of tech giants Apple and Microsoft just a few years ago.
Nvidia reaching $4 trillion is a testament to investor optimism for artificial intelligence and the tech sector, and the run-up in the stock is impacting some investors even if they don't own shares outright. That's because Nvidia is a component of the S&P 500 (^GSPC +0.28%) index, the Dow Jones Industrial Average (^DJI +0.15%) index, and the Nasdaq-100 index, which tracks the 100 largest nonfinancial stocks listed on the Nasdaq stock exchange.
Here's why Nvidia's move has rippling effects throughout the stock market and why the major indexes are becoming even more concentrated.
Image source: Getty Images.
The largest funds are based on stock market indexes
Stock market indexes are used by professional and individual investors alike to compare their performance against.
The S&P 500 is arguably the most balanced benchmark because it features just over 500 of the largest U.S. companies by market cap. However, the Nasdaq-100 may be the preferred choice for growth-focused investors and fund managers.
The Dow Jones is the oldest benchmark, containing 30 industry-leading blue chip companies. Although not as representative of the broader market, the Dow is still useful for comparing large-cap companies. And it has modernized with the addition of Nvidia, Amazon, and Salesforce in the last five years.
Many index funds and exchange-traded funds (ETFs) are also heavily based on the stocks in the major benchmarks. The Vanguard S&P 500 ETF (VOO +0.31%) mirrors the performance of the index. It is one of the largest ETFs in the world, with $1.43 trillion in net assets.
Vanguard also has one of the largest growth funds in the world -- the Vanguard Growth ETF (VUG +0.18%) -- with $294 billion in net assets. Many of the fund's top holdings are also the largest companies in the Nasdaq Composite.
The Invesco QQQ Trust (QQQ +0.37%) is the largest Nasdaq-100 fund, with $334 billion in net assets. This fund is a popular choice for growth investors looking to mirror the performance of the benchmark.
Nvidia takes up a lot of space
Nvidia's rise to $4 trillion in market cap hasn't been an isolated event. Many other megacap growth companies are also hovering around all-time highs, which has changed the composition of the major indexes and many well-known funds.
Here's a look at the top 10 holdings in three major indexes.
|
Holding Rank |
Nasdaq-100 |
S&P 500 |
Dow Jones | |||
|---|---|---|---|---|---|---|
|
Company |
Weight |
Company |
Weight |
Company |
Weight | |
|
1 |
Nvidia |
13.6% |
Nvidia |
7.1% |
Goldman Sachs |
9.6% |
|
2 |
Microsoft |
12.8% |
Microsoft |
6.7% |
Microsoft |
7% |
|
3 |
Apple |
10.7% |
Apple |
5.6% |
Caterpillar |
5.6% |
|
4 |
Amazon |
8.1% |
Amazon |
4.2% |
Home Depot |
5.1% |
|
5 |
Alphabet |
7.3% |
Alphabet |
3.8% |
Visa |
4.9% |
|
6 |
Meta Platforms |
6.3% |
Meta Platforms |
3.3% |
Sherwin-Williams |
4.9% |
|
7 |
Broadcom |
4.5% |
Broadcom |
2.3% |
American Express |
4.4% |
|
8 |
Tesla |
3.3% |
Berkshire Hathaway |
1.8% |
UnitedHealth Group |
4.2% |
|
9 |
Netflix |
1.9% |
Tesla |
1.7% |
Amgen |
4.1% |
|
10 |
Costco Wholesale |
1.5% |
JPMorgan Chase |
1.4% |
McDonald's |
4.1% |
Data source: Slickcharts.
Notice how megacap growth-focused companies dominate the Nasdaq-100 and the S&P 500, but not the Dow Jones Industrial Average. The Dow is price-weighted, so stocks with higher prices carry the most weight regardless of market cap, whereas the Nasdaq-100 and S&P 500 are market-cap -eighted. Since Nvidia underwent a 10-for-1 stock split in 2024, its stock price isn't very high despite sporting the largest market cap of any company in the world. In fact, Nvidia doesn't even crack the top 10 Dow companies, featuring a mere 2.3% weighting in the index given its relatively low stock price.
Managing risk across ETFs and individual stocks
Knowing what comprises the bulk of a stock market index can help you quickly interpret information and broader market movements, filtering out noise so you can focus on achieving your investment objectives.
For example, the Nasdaq-100 is soaring right now and just hit a new all-time high largely because top holdings like Nvidia, Microsoft, Amazon, and Meta Platforms are also making (or close to making) new all-time highs. Meanwhile, a movement in the Dow Jones might have more to do with large-cap financial stocks.
Understanding the ins and outs of stock market indexes can help you better understand what you own. Since megacap tech-focused companies have gotten so large, there's now more overlap between the Nasdaq-100 and S&P 500. So if you buy an S&P 500 index fund and a growth-focused fund, you are getting exposure to many of the same names, just in higher concentration with the growth fund.
If you're not sure exactly what you own, it may be useful to conduct a portfolio review to see your true exposure to a company. For example, if a portfolio had 50% exposure to the S&P 500 through an index fund, 25% in the Invesco QQQ, and had a 5% holding in Nvidia, the true exposure to Nvidia would actually be 12% if you factor in Nvidia's weight in those indexes.
That may be fine for folks who are confident in Nvidia's long-term investment thesis. But let's say that you invested in Nvidia years ago with a small position, but it got a lot bigger because the stock has done well. And you also bought index funds to achieve diversification, not necessarily boost your Nvidia exposure. In that case, it may be a good idea to make sure you aren't taking on more risk in an individual stock than you intended.
