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Managing Editor’s Note: Today, we’re hearing from our contributing editor Mike Burnick in his weekly feature.
Mike has over 30 years in the investment and financial services industry – from operating as a stockbroker, trader, and research analyst, to running a mutual fund as a registered investment advisor and portfolio manager, to being Research Director for the Sovereign Society, specializing in global ETF and options investing.
And he’s been senior analyst at TradeSmith for three years, running Constant Cash Flow, Infinite Income Loop, and Inside TradeSmith.
Here’s Mike…
In Today’s Concentrated Market, Know What You Own
BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTEDespite the recent pickup in market volatility, the US economy has been running strong according to recent data.
In fact, US GDP growth is set to accelerate to 3.3% this quarter. That’s well above last quarter’s 1.6% growth rate.
When economic growth is accelerating, one sector that stands to benefit most is Consumer Discretionary stocks (aka Consumer Cyclicals). This includes companies like auto manufacturers, retailers, hotel and restaurant chains, etc.
So, you might think it’s a good idea to overweight the consumer cyclical sector in your investment portfolio. But you may want to rethink that idea.
Because this is not your father’s consumer cyclical index!
Simply take a closer look at the S&P 500 Consumer Discretionary ETF (XLY) on TradeSmith Finance and you’ll see what I mean.
To view our data on XLY simply click on Markets, then on S&P Sectors, and scroll down to locate Consumer Cyclical and click on the highlighted link, as shown above.
This takes you to the Holdings page for XLY.
At top you’ll find our proprietary TradeSmith data on this sector including Health, Trend and Stock Rating Distribution, Seasonality and much more valuable research.
Now scroll down a bit further to view the top stock holdings of the Consumer Cyclical sector and you may be surprised to see how top-heavy this sector is.
As you can see above, this sector is really just a two-horse race.
Amazon (AMZN) and Tesla (TSLA) have a combined market cap weight of 45.4% in the consumer cyclical index!
In fact, these two stocks have a greater weight than the next 22 stocks in the index combined! And this includes household names like Home Depot, McDonald’s, Starbucks, Hilton, General Motors and Nike, just to name a few.
So, when you consider buying this index of consumer stocks, you’re really investing 50-cents of every dollar in just two stocks, AMZN and TSLA.
That’s a cautionary tale about just how top-heavy the stock indexes are today. Just a handful of companies in the S&P 500 – basically the top 10 stocks – account for HALF of the index by market cap.
Bottom line: And old Wall Street proverb I learned in the 1980s is: “Know what your own … and why you own it.” That’s never been more true than in today’s highly concentrated stock market. Don’t buy any index ETF unless you take a closer look at the stocks you’re really buying. Because you may not like what you see.
Good investing,
Mike Burnick
Contributing Editor, Market Minute