A peek under the surface of the C Fund can help readers understand their investment a bit more, and see some of what is going on in there in relation to stock prices, fundamentals, and concentration in this challenging economic and financial environment. Image: leungchopan/Shutterstock.com

Lyn Alden

The C Fund follows the S&P 500 index, which represents among the largest 500 publicly-traded companies in the United States.

We often think of it as one big block of companies. Sometimes valuations go up together, sometimes valuations go down together, and of course there are winners and losers within the index along the way. Big losers end up getting cut from the index, replaced by up-and-coming companies that make it to the “big leagues” from small and medium indices.


At certain times, the divergence widens to a larger-than-normal amount. A few weeks ago, for example, I pointed out that just five stocks now make up 20% of the C Fund, which is the largest ever concentration in C Fund history. We have to go back to the early 1980’s, before the inception of the C Fund, to find a higher level of concentration when AT&T and IBM dominated the S&P 500 index.

If we look at year-to-date performance of major stock index funds, we see an interesting pattern:

C Fund: Divergence Under the Surface

Chart Source: YCharts

The Nasdaq 100 (shown above as the QQQ ETF), has over 40% of its assets in the top 5 stocks: Microsoft, Apple, Alphabet, Amazon, and Facebook. This index has done very well this year and is in positive territory.

The S&P 500 (which the C Fund tracks), has over 20% of its assets in those same 5 stocks and has also performed decently this year.

The equal-weight S&P 500 invests in the same 500 stocks as the S&P 500, but rather than weighting them by market capitalization, it weights them equally. So, the top 5 stocks in the equal weight version of the index only account for about 1% of the index, rather than over 20%. This version of the index has outperformed the S&P 500 over the multi-decade long run, but has significantly underperformed so far in 2020, because a lot of the performance in 2020 was from the top 5 stocks.

The mid-cap and small-cap value index funds have underperformed even more significantly. Many of these companies are in the TSP S Fund.


International stocks (EAFE and emerging markets in the chart above) have had similar performance to the equal-weight S&P 500, and therefore worse performance than the normal market-cap weighted S&P 500. This is interesting because rather than U.S. stocks broadly outperforming international stocks, this year has significantly been a case of the top 5 U.S. stocks outperforming almost everything else (most other U.S. stocks and international stocks).

A Tale of Two Stocks

If we drill down a bit, we can compare two unrelated stocks as examples that are both within the C Fund.

The first example is the well-known Apple stock, which is currently the second largest holding in the C Fund at over 5.4% of the 500-company fund. The average weighting of a company in the C Fund is 0.2%, so Apple has a weighting that is 27 times larger than a typical company in the index.

Apple’s price-to-book ratio and price-to-sales ratio are both above their 5-year average at the moment, meaning the stock is more expensive than it has typically been over this time period. The dividend yield is lower than its 5-year average (which also means the stock is more expensive than average, since the stock price is high relative to the dividend):

Chart Source: YCharts

If we look at how the stock price (black line in the chart below) has fluctuated compared to its fundamental growth (orange and blue lines in the chart below), we can see that the price significantly diverged to the upside from the underlying growth in recent years. The dotted lines represent analyst consensus future growth, which might or might not come to pass:


Chart Source: F.A.S.T. Graphs

On the other hand, we can look at a more typical stock, Union Pacific, as our second example. Union Pacific is one of the two largest railroad companies in the United States and accounts for 0.45% of the C Fund. They transport agricultural products, energy products, chemicals, cars and auto parts, and intermodal cargo containers through the United States west of the Mississippi river.

Their valuation metrics are a bit more mixed:

Chart Source: YCharts

Their price-to-sales and price-to-book ratios are also elevated compared to the past 5 years, but by smaller margins. The dividend yield on the other hand is higher than its 5-year average, meaning that the stock price is cheaper relative to the dividend it pays.

As the next chart shows, the stock price (black line below) has more closely tracked company fundamentals (blue and orange lines below), which makes it look like a very efficient and at least at first glance, fairly-priced stock:

Chart Source: F.A.S.T. Graphs

For a final chart, here’s a look at another valuation metric for both stocks, which is the current price divided by the inflation-adjusted average of the past 5 years of earnings. Using the average of the last five years of earnings filters out a lot of the “noise” that can happen to earnings within any given individual year:

Chart Source: YCharts

Apple has on average traded with a 5-year P/E ratio of a little over 21, but is currently over 30. Union Pacific, on the other hand, has also traded on average with a 5-year P/E ratio of a little over 21, but is currently below 19.


It’s interesting to note that in the economic slowdown of 2016 (which by many metrics was nearly a recession), both stocks went down considerably in valuation. This time in 2020 it was different, with Apple doing quite fine in terms of valuation while Union Pacific went down similarly to where it was in 2016.

It’s not just these two stocks that have this divergence; it’s a common theme with several of the mega-cap companies compared to many of the more average or typical stocks within the C Fund.

The conclusion from this is up to reader interpretation.

One possibility, for example, is that as the economy eventually recovers after COVID-19, this divergence within the C Fund could narrow and revert to the mean, and the overall result might be that even though many of the smaller components of the C Fund start to recover, the overall C Fund price doesn’t change much. In other words, some big stocks like Apple and Microsoft could keep doing fine fundamentally, but their valuations decline a bit closer to their historical average, which would have a negative impact on the C Fund due to how large they are within the fund.


Alternatively, perhaps this divergence will remain for a while.

Either way, these sorts of peeks under the surface of the C Fund can help readers understand their investment a bit more, and see some of what is going on in there in relation to stock prices, fundamentals, and stock concentration in this challenging economic and financial environment.

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.

TSP Investors Handbook, New 7th Edition