Ferri: Apple Of Your Eye - Total Market ETFs

August 12, 2015

“The Big Apple” is the famous nickname for New York City. It was made popular in the 1920s by John J. Fitzgerald, a writer for the Morning Telegraph. The name was also popular with jazz musicians in the 1930s and ’40s who coveted gigs in posh Manhattan nightclubs.

Most people still associate “The Big Apple” with NYC, but there may be a challenger. The challenger is Apple Inc. (ticker: AAPL).

Apple is the most valuable corporation in the world. At around $700 billion in market capitalization, AAPL’s free-float market capitalization is nearly twice the value of any other company. Accordingly, AAPL’s dominance has had a meaningful impact on the return of stock indexes in the U.S. and globally.

Apple has grown to become such a large portion of the S&P 500 that S&P Dow Jones Indices (SPDJI) created ex-Apple indexes to see how the benchmark would have performed without AAPL’s influence. Figure 1 illustrates the difference in cumulative price-only returns of the S&P 500 with and without Apple stock over the years. Shown are cumulative price gains through Aug. 5, 2015. Dividends and dividend reinvestment are not included.

A look further back finds that since 1989, the annualized compounded price return of the S&P 500 has been 7.21 percent with AAPL and 7.06 percent without, according to SPDJI data. The 0.15 percent annual difference in return may not seem very large, but compounded over the years, it can have a sizable impact in long-term performance in a portfolio. Active managers who excluded Apple because of its perceived high valuation at times would have difficulty adding value after accounting for this shortfall.

Apple’s impact on the S&P 500 is significant, yet in the grand scheme of things, the company doesn’t even rate in the top 20 of the most influence U.S. companies in S&P history. According to Howard Silverblatt, senior index analyst at SPDJI, International Business Machines (IBM) had nearly double the influence in the early 1980s when PCs were new and IBM was expected to dominate the market.

IBM did not become the dominant PC supplier, and the company fell far down the list of the largest global companies. There’s no way to know where Apple will be on the list in 30 years, or the name of the next company to dominate the S&P 500. Perhaps the top company isn’t public yet or has not even been formed.

The way to avoid guessing the top company and being wrong is not to exclude any companies from your portfolio. This can be done through total market index funds and exchange-traded funds that include nearly all stock that trade regularly on the U.S. exchanges. With total market index funds, you’re sure to own the next top company soon after it becomes public.


For a full list of relevant disclosures, click here. Rick Ferri, founder of Michigan-based Portfolio Solutions, is a widely recognized index investor and the author of several books on index investing.

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