I wrote an article with the same title in 2020 (tinyurl.com/stockmarketarticle2020), when the market capitalization of the top 10 stocks in the overall US stock market exceeded 20% (30% of the S&P 500 index).
Today, the contribution of the top ten stocks has risen even further, to 32% of the market capitalization of the S&P 500. America's number one stock alone is currently worth about the same as the entire stock market. from China, as Steve Goldstein pointed out in a recent MarketWatch article. Have we reached a point of excessive risk in the US stock market?
I noted in the previous article that it has historically been common for a few stocks to dominate the various US stock indexes. But how does that compare to other countries' stock markets? You may be surprised to learn that the concentration at the top is even more pronounced elsewhere.
Morningstar reports the percentage of assets in the top 10 ETF holdings.
Here is the list of concentrations of the top 10 stocks in each of the seven largest developed nations at the time of this writing, represented by large-cap ETFs (in parentheses) that act as proxies for each of those countries:
As you can see, only Japan has a lower top 10 concentration than the United States, and not by much. The stock market of all other developed countries is even more concentrated at the top than ours. Logically this makes sense since they have fewer companies in their indices. With the exception of Japan, every other country's ETFs are made up of fewer than 100 stocks. Additionally, all of these indices are capitalization weighted. That means more weight is given to the most popular stocks, further increasing representation at the top of the rankings.
Lest you think the best investment strategy is to buy only the top 10 stocks, keep in mind that in 2022 half of them have fallen much more than the S&P 500 overall. And as I shared in the previous article, it's rare for top stocks to continue outperforming year after year. In the last four years, 40% of previous leaders have changed
(Nvidia, Eli Lilly, Broadcom and Tesla have replaced JP Morgan, Johnson & Johnson and Visa).
The bottom line: Whether you look at historical US data or analyze current international data reports, almost all stock indices will appear to be highly concentrated. In reality, it turns out that the United States has one of the least concentrated stock markets in the world.
Los Altos resident Artie Green founded Cognizant Wealth Advisors (DBA: Perigon Wealth Management, LLC, a registered investment advisor).