Mutual Funds

American investors have a whole lot riding on Big Tech

Suzanne Woolley | Updated on August 30, 2020

Retirement plans hold concentrated tech positions

Many Americans have hitched their financial future to Big Tech, whether they realise it or not.

Just five companies make up about 24 per cent of the S&P 500 Index — Apple, Amazon.com, Microsoft, Facebook and Alphabet — up from 17 per cent at the start of the year. That means a significant chunk of Americans’ net worth and the security of their retirement may hinge on the success or failure of a handful of stocks.

In an attempt to spread out risk, many 401(k)s (an employer-sponsored defined-contribution pension account in the US), pensions or other retirement savings plans use passive funds that mimic the S&P 500.

But the massive run-up in a few blockbuster stocks leaves investors far less diversified than they may think.

The leading stock in the S&P 500 carries more than twice as much weight now as it did a decade ago. Apple accounts for 7.2 per cent of the index, while in 2010, ExxonMobil was on top with about 3.2 per cent. On Monday, ExxonMobil was kicked out of the Dow Jones Industrial Average, making way for Salesforce.com.

In addition, some of the largest actively managed mutual funds in retirement savings plans such as 401(k)s hold highly concentrated tech positions.

As of June 30, three stocks — Amazon, Facebook and Microsoft — made up 23.7 per cent of the $128-billion Fidelity Contrafund.

Meanwhile, more people are buying tech stocks on the side, as the rise of a new generation of retail investors trading commission-free on mobile apps coincides with new services that allow investors to buy portions of shares. These fractional shares, as they’re known, make the highest-priced stocks suddenly within reach.

Other investments have also camouflaged tech. Berkshire Hathaway’s stake in Apple has swelled to about $122 billion and at the end of the second quarter made up some 44 per cent of its stock portfolio.

The expectation that working and shopping from home will be far more common in coming years is one reason why some are confident that Big Tech stocks are well worth their valuations.

Advisors are recommending that people hedge or move money into less expensive areas of the market, like small-cap stocks and international stocks.

They’re also hearing from people who are normally conservative but are fearful of being left behind.

Wealth manager Kenneth Van Leeuwen of Van Leeuwen & Co, in Princeton, New Jersey, had some clients ask, hopefully, if they owned Amazon.

He answered no, but they do own Apple, which he thinks is a better value, and has a dividend, unlike Amazon.

Bloomberg

Published on August 30, 2020

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