Do you know that you hold shares in Facebook, Apple, Amazon, Netflix and Google? Probably quite a few shares. These companies, known as FAANG by investment pros, make up 19% of the Standard and Poor’s 500 index. The S&P 500 is the index tracked by the C Fund, and the C Fund is, by far, the largest of the Thrift Savings Plan’s stock funds. The C Fund makes up a portion of all of the Lifecycle (L) Funds too; from close to 50% of the L 2065 Fund to a little over 12% of the L Income Fund. If you have $300,000 in your TSP and you have all your investments in the C Fund, you have $57,000 invested in the FAANG stocks.
The reason for this is that the S&P 500 is “weighted” by the capitalization of the stocks that make it up. That means that the greater the value of the company’s outstanding shares of stock (market capitalization), the more of the index that particular stock takes up. One would determine the capitalization of a particular stock by multiplying the share price of a particular stock by the value of shares outstanding. In an index which is capital weighted, changes in the market value of the larger stocks move the index more than changes in the market value of the smaller stocks. In fact, four of the FAANG stocks are in the S&P 500’s top ten and the remaining one is number 20 in capitalization. Apple, the largest stock in the entire S&P 500 has a market capitalization of $2.4 trillion dollars. The smallest of the FAANG stocks, Netflix, has a market capitalization of $240 billion dollars.
Here’s how the stocks line up based on their capitalization, their rank in the S&P 500, and their percentage of the index. 1) Apple – 6.8% of the index; 3) Amazon – 3.7%; 4) Facebook – 2.4%; 5) Google class A – 2.19%; 6) Google class C – 2.04%; 20) Netflix – 1.42%. Who’s number 2? That would be another tech giant, Microsoft, with 6.2%. The 500th company in the S&P 500 is Fox, which makes up 0.012%.
From the above information you can see that the first 6 stocks by capitalization are in the area of information technology. The portion of the S&P 500 that is taken up by “tech” stocks has been constantly growing. Tech stocks make up over a quarter of the index, 27.63% to be exact. This is up from 20.77% at the beginning of 2017. The share of the index that is occupied by tech is more than the 26.2% weighting of the next two sectors (healthcare and consumer discretionary) combined.
Retirement expert Bob Carlson says that indexes that are capitalization weighted (most of them) are a form of “momentum investing” where a larger and larger proportion of our investment in the index is found in stocks that have done well recently. That’s well and good when things are going well, but it has our investment chasing trends in the market; and trends can be down as well as up. A crash in the tech sector would affect the value of the C fund far greater than would a crash in the industrial sector, which represents 8.4% of the S&P 500.