- Diversification benefits offered by broad market index investing have long made it an enticing and popular option. However, the composition of one of the most broadly followed indices, the S&P 500, has meaningfully changed over recent years.
- Seven of the eight largest weighted companies in the S&P 500, as of 3/31/2022, represented 27% of the index. Of note is the fact that these seven names are all primarily driven by the same factors – exposure to the mega-large cap technology momentum trade.
- Factor analysis identifies performance catalysts for a given security. This allows an investor to accurately isolate contributors of return for each position, a key distinction when creating a truly diversified portfolio. For example, Vaughan Nelson’s Select strategy typically holds 30 names or less, but the portfolio has always maintained exposure to a broad number of factors.
- Given the concentration and similarities amongst the largest S&P 500 names, the S&P 500’s factor diversification has declined while Vaughan Nelson’s Select strategy has remained relatively constant.
Diversification does not guarantee a profit or protect against a loss.
S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.
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