The Secret Market Risk Hiding in the Major Indexes

There's a serious market risk many investors don't know about...

And it's hiding in some of the biggest index funds out there... and possibly in your own portfolio.

But you likely won't see it, nor even think about it, until it goes off right when you're standing on top of it. Like a landmine.

And unfortunately for many investors, this risk is becoming bigger and bigger every year.

It's one of the reasons many index funds lost so much money last year despite the fact that U.S. companies dominated the global top performers in 2022.**

That's all made worse by the fact that most individual investors are often advised to put their money in major index funds like SPY and QQQ, and that's exactly where this risk is hiding.

You see, thanks to the way that most indexes (and therefore, most index funds) are weighted, only a handful of massive companies control the performance. They are in the driver's seat. The bigger the company's market cap, the bigger the spot it represents in the portfolio. That's why you have, say, Microsoft and Apple making up about 26% of QQQ, the index fund tracking the Nasdaq 100, while AMD and Intel make up only 2%.

In fact, just take a second to look at the top six components of QQQ (if you pair GOOG and GOOGL).

Nasdaq 100 QQQ Components

1. Microsoft Corp (MSFT) 13.33%

2. Apple Inc (AAPL) 12.64%

3. Inc (AMZN) 6.32%

4. NVIDIA Corp (NVDA) 5.20%

5. Meta Platforms Inc Class A (META) 4.06%

6. Alphabet Inc Class A (GOOGL) 3.81%

7. Alphabet Inc Class C (GOOG) 3.78%

These six companies represent 50% of the index.

So as long as these six companies are looking good, QQQ is going to look pretty great. As long as each of these six companies are up 1%, all 94 other companies in this index could be down 1%, and QQQ would still not show a loss.

In fact, let's look at a chart of QQQ I posted at the end of last week. Looks pretty good, right?

But underneath the hood, things are not so shiny.

This next chart shows QQQE, which is exactly the same as QQQ except for one thing - it equal weights the components instead of weighing them by market cap. In other words, every single stock represents about 1% of the fund. Those seven tickers that represent half of QQQ represent 7% of QQQE.

These two charts are night and day; one is meandering lower (QQQE) and the other is booming higher (QQQ)...

Which brings me back to the landmine.

Money has been piling into those six behemoths - MSFT, AAPL, AMZN, NVDA, GOOGL + GOOG, and META - and they are currently holding up the entire U.S. market.

Do you know why it is illegal to yell "FIRE" in a crowded theater when there is no fire? Because it can cause a stampede. 

What happens if there's some kind of bad news and droves of people try to sell one or a few of these names? What happens if one of these companies whiffs an earnings report?

The pressure's building in the major indexes...there's silence...then...


Until next time,

Mark Sebastian


The post The Secret Market Risk Hiding in the Major Indexes appeared first on The Profit Takeover.

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