The Danger of 'Diversified' Indexes

Many folks invest in companies they recognize... For example, the world's biggest businesses get a lot of attention – and rightfully so. Companies like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) all make products that we use every day. [Chaikin PowerFeed]( Editor's note: The markets and our Chaikin Analytics offices will be closed Monday, December 26, in observance of Christmas, so we won't publish the Chaikin PowerFeed e-letter that day. You'll receive your next issue on Tuesday, December 27. Enjoy the holidays! The Danger of 'Diversified' Indexes By Karina Kovalcik, senior quantitative analyst, Chaikin Analytics Many folks invest in companies they recognize... For example, the world's biggest businesses get a lot of attention – and rightfully so. Companies like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) all make products that we use every day. Some investors might even allocate a large portion of their portfolios to these stocks. And frankly, this type of outsized bet paid off for folks over the past decade. After all, these tech titans all produced incredible returns as the bull market ripped higher and higher. But today, things are getting a little strange... Many investors are making an even bigger bet on these stocks right now. And a lot of them don't even realize it. Even worse, it sets folks up for disaster as these stocks fall – like many have this year... Recommended Links: [The EXACT Day Stocks Will Finally Bottom]( Goldman Sachs doesn't know... Bank of America doesn't know... Morningstar doesn't know... but Marc Chaikin believes he does. He called the bottom in 2020, just 24 hours before the fastest bull market in history. Now, Marc believes he has spotted the NEXT market bottom - and he's sounding the alarm. Plus, he's sharing the names of what he says will be the best – and worst – performing stocks of 2023. [Click here for full details](. [A Gold Storm Is Coming]( Some of the richest men in the world are jumping in right now... because evidence suggests we could see MUCH HIGHER gold prices before the end of this year. But if you're not taking advantage of a little-known way to invest for less than $10, you're missing out. [Click here for full details](. We all understand the basics of "diversification"... It's the whole idea about not putting "all your eggs in one basket." If that one basket breaks, you'll lose all your eggs. In an effort to diversify their portfolios, people often invest in the S&P 500 Index... After all, the S&P 500 is made up of the 500 largest companies by market cap on U.S. stock exchanges. And since it includes so many stocks, investors assume that it's diversified. But that's where people go wrong. Let me show you what I'm talking about. Here's a breakdown of the S&P 500's top 10 holdings... [Chaikin PowerFeed] And as you can see, Apple and Microsoft are the two largest companies in the S&P 500. Together, they currently make up almost 12% of the entire index. That might not seem like a lot at first. But let's say you already hold a 10% stake in Apple. And 50% of your portfolio is tied up in an exchange-traded fund ("ETF") that tracks the S&P 500. The math gets a little confusing, but here's the main point... Your expected exposure to Apple is 10%. But because you also indirectly hold some of the company's shares through the S&P 500, your real exposure jumps to more than 13% without the stock even moving. Sure, extra exposure could work in your favor if the stock goes up. But that also causes your exposure to creep even higher. And then, when the stock falls, it hurts worse. Plus, many folks operate a 401(k) account for retirement and another personal account that they use in the nearer term. So in reality, this exposure often exceeds 15%. A perfectly diversified, 500-stock portfolio should feature a 0.2% weighting in each position. But in the S&P 500, Apple's weighting is currently more than 30 times that amount. Even worse, other ETFs end up with overexposure to the top tech companies, too. And unsuspecting investors have no idea that it's increasing their risk. For example, just look at the iShares ESG Aware MSCI USA Fund (ESGU). It's the largest "ESG" ETF on the market. It has more than $19 billion in investor money behind it. Now, ESGU supposedly tracks stocks that have "favorable environmental, social, and governance ('ESG') ratings." But guess what its top 10 holdings look like... [Chaikin PowerFeed] Once again, Apple takes an outsized slice of the pie. It accounts for more than 6% of ESGU. Astute readers will realize that it's the exact same weighting as the S&P 500 itself. (I wrote about these "stealth ESG scams" and how they can kill your returns [back in June]( If you invest in a few ETFs like that, your portfolio will end up with little diversification at all. And if the stocks you're overexposed to start plunging... watch out. That's what happened with a lot of these tech stocks this year. And a lot of investors suffered big losses as a result. In the end, it takes a much more "active" approach to make sure you're actually investing your money the way you want. Otherwise, you're flirting with danger every day. Don't just blindly count on others to "diversify" your portfolio. Do it yourself. Good investing, Karina Kovalcik Market View Major Indexes and Notable Sectors # Hld: Bullish Neutral Bearish Dow 30 -0.96% 8 21 1 S&P 500 -1.38% 113 270 114 Nasdaq -2.45% 25 53 22 Small Caps -1.25% 450 963 479 Bonds -0.02% — According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks remain somewhat Bearish. Major indexes are mixed. * * * * Top Movers Gainers [rating] FDX +3.35% [rating] VFC +2.95% [rating] WBD +2.10% [rating] KR +1.78% [rating] VNO +1.76% Losers [rating] TSLA -8.88% [rating] LRCX -8.65% [rating] AMAT -7.84% [rating] CCL -7.08% [rating] NVDA -7.04% * * * * Earnings Report Reporting Today Rating Before Open After Close No earnings reporting today. Earnings Surprises [rating] PAYX Paychex, Inc. Q2 $0.99 Beat by $0.03 [rating] KMX CarMax, Inc. Q3 $0.24 Missed by $-0.43 * * * * Sector Tracker Sector movement over the last 5 days Staples -0.58% Financial -0.59% Industrials -0.72% Health Care -1.10% Energy -1.22% Communication -1.50% Materials -1.81% Utilities -2.11% Information Technology -3.65% Real Estate -4.89% Discretionary -5.80% * * * * Industry Focus Health Care Services 14 43 10 Over the past 6 months, the Health Care Services subsector (XHS) has outperformed the S&P 500 by +3.79%. Its Power Bar ratio, which measures future potential, is Strong, with more Bullish than Bearish stocks. It is currently ranked #8 of 21 subsectors and has moved up 1 slot over the past week. Top Stocks [rating] CAH Cardinal Health, Inc [rating] ABC AmerisourceBergen Co [rating] CI Cigna Corporation * * * * You have received this e-mail as part of your subscription to PowerFeed. If you no longer want to receive e-mails from PowerFeed, [click here](. You’re receiving this e-mail at {EMAIL}. For questions about your account or to speak with customer service, call [+1 (877) 697-6783 (U.S.)](tel:18776976783), 9 a.m. - 5 p.m. Eastern time or e-mail info@chaikinanalytics.com. Please note: The law prohibits us from giving personalized investment advice. © 2022 Chaikin Analytics, LLC. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Chaikin Analytics, LLC. 201 King Of Prussia Rd., Suite 650, Radnor, PA 19087. 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