Today’s Chart of the Day is a comment about a unique risk that can occur in successful index funds. For instance, we often hear about what many call the “Tech-Heavy NASDAQ” which refers to the Invesco QQQ Trust Exchange Traded Fund (ETF), the 5th largest exchange-traded fund in the US.
This fund represents the top 100 companies that trade on the NASDAQ stock exchange. The NASDAQ stock exchange is the second largest of 13 stock exchanges in the US and a close competitor of the New York Stock Exchange, which is the largest.
Out of the top 100 companies in the index, six stocks account for 55% of the total assets: Microsoft, Apple, NVIDIA, Amazon, Tesla, Meta, and Google. Since these six stocks have done so well versus other stocks over the last ten years, their percentage of the index continues to grow.
Index funds are fantastic investment products. However, as with all things, when the market changes, they change with it. This is why both the market and index funds need to be monitored and changes made to portfolios when needed. As the great Peter Lynch said, “Know what you own, and why you own it.”
The chart shows the value of $100 invested in the S&P 500 (in blue) versus the Invesco QQQ Trust (in orange) over the last 10 years.
