SPY Losing to 10 Market Segments as Rotation Broadens

S&P 500 index funds have a diversification problem.

The largest fund to track the key stock market benchmark, the SPDR S&P 500 Trust ETF (SPY), is losing to 10 major market segments over the past month.

What do all the recent market leaders have in common? They have little to zero exposure to the mega-cap tech stocks known as the Magnificent 7.

Since July 10, the Mag 7 have collectively declined by more than 12%, as measured by the Roundhill Magnificent Seven ETF (MAGS).

The Mag 7 stocks comprise roughly one-third of the cap-weighted S&P 500 index, which until this month had outperformed most of the market segments that are now beating it.

The greatest example of the turn in market performance is the iShares Russell 2000 ETF (IWM), up more 8% in the past month, compared to SPY’s gain of less than 2%.

Other market segments that are outperforming the S&P 500 include midcap and value stocks, a range of sectors including real estate, financials, and utilities, as well as commodities and alternative assets like gold and bitcoin.

SPY vs 10 Top Performing ETF Market Segments

Data as of July 23, 2024. Past performance is no guarantee of future results.

Risks of Investing in SPY, S&P 500 Index Funds

While technology stocks have been a major performance driver for SPY and other S&P 500 index funds, investors should remain aware of the potential risks associated with its heavy concentration as the tech sector represents 33% of the index:

Concentration risk: A significant portion of the index’s performance relies on a relatively small number of tech companies. Any negative event affecting these companies can disproportionately affect the overall index.
Valuation concerns: Tech stocks often trade at premium valuations compared to other sectors. This can make them more susceptible to corrections if investor sentiment shifts or interest rates rise.
Sector rotation: The market tends to go through cycles. If investor focus shifts to other sectors or market segments, the technology sector might underperform, dragging down the S&P 500.

Investors should remember that diversification is key to smart portfolio construction. While the S&P 500 is a broad index, its heavy weighting in technology can increase portfolio risk. Investors might consider diversifying across different sectors, market segments or asset classes to mitigate this concentration risk.