Mind the (market) cap

• The U.S. equity market has shifted, with the top 20 stocks in the S&P 500 accounting for 45% of the index and 60% of its total return over the last five years, driven largely by tech giants like Microsoft, Nvidia, and Amazon.
• Some advisors want to increase exposure to mega cap companies due to their strong performance and fundamentals while others are looking to diversify into the next generation of market leaders.
• iShares Build ETFs let investors tailor portfolios to dial up their mega cap exposure with TOPT, OEF, and QTOP, bring it back to neutral with IVV, or dial it down with QNXT and EUSA.

The shape of the U.S. equity market has evolved dramatically over the last few years with Big Tech having a larger impact. The S&P 500, a proxy for U.S. equities, shows that the top 20 stocks now account for ~45% of the index while contributing 60% of its total return over the last five years.¹

While many headlines have called out the narrow leadership, it’s important to remember that broad market indexes simply reflect the market: each stock’s weight is proportionate to the company’s size. And as broad market cap weighted indexes represent the aggregate view of investors, they also showcase broader societal and economic shifts.

Thirty years ago, the U.S. stock market appeared more diversified across sectors (Figure 1). Once led by Consumer Staples, today's market is driven more by Technology. With shifts in societal trends, traditional industries have been replaced by tech giants and service-oriented firms reflecting the evolving needs of a more connected, data-driven economy. Today, the largest companies in the index include Microsoft, Nvidia, and Amazon, which have been at the forefront of the technological innovations powering these economics shifts. These companies have delivered consistently strong earnings growth, and in return, investors have rewarded them with higher stock prices. The 20 largest companies represent ~$23tn² in market cap- almost as large as the U.S. economy with its $27tn GDP in 2023.³

Just as the world doesn’t all move to the beat of one drum, there are differing views on whether this mega cap technology leadership may continue.

On one hand, advisors that believe that this trend will persist point to mega cap stocks being household names for a reason. According to Morningstar, 17 of the top 20 names in the S&P 500 have a “wide” economic moat, characterized by high network effects, substantial intangible assets, cost advantages, high switching costs, or efficient scale which give them a competitive edge.⁵ And over the past year, the top 20 names have also seen revenue growth of 14.8% for the top 20 vs. 4.07% for the next 480 in the index.⁶

Considering these trends and the fact that the average U.S. Asset Manager Moderate Model Allocation and average active U.S. Large Blend fund have sizeable underweights to mega cap stocks⁷, some advisors may see this as an opportunity to add more mega cap exposure to their portfolios.

On the other hand, some advisors are currently taking stock of their allocations because higher returns from the largest companies have also been accompanied by higher risk. Relative to the more diversified S&P 500, a portfolio of the top 20 names has seen higher total risk over the past five years.⁸ Furthermore, smaller companies may benefit more from innovation through new technologies, and their earnings growth may be justification for further investment. In fact, based on a BlackRock study of over 23,000 portfolios, advisors are ~5-6% overweight small cap stocks within their equity allocation relative to the broad equity market benchmark.⁹ Advisors with this view may look to further diversify away from mega cap names and lean more into small companies.

Regardless of the view, advisors should consider being more intentional within their U.S. equity exposure in this environment.

Advisors that are rethinking their U.S. equity allocations have a broad array of tools to choose from. The iShares Build ETFs help advisors construct their portfolios with precision (Figure 2)¹⁰:

• The iShares Core S&P 500 ETF (IVV) provides an efficient way to access the large-cap segment of the U.S. equity market.
• Advisors who believe in the continued success of mega cap stocks may consider adding the top 20 (TOPT) or top 100 stocks (OEF) in the S&P 500, or the top 30 stocks in the Nasdaq 100 (QTOP). These funds can increase a portfolio’s exposure to mega cap companies.
• Those looking to rein in exposure to these market leaders could consider investing in the 70 smaller companies from the Nasdaq 100 (QNXT). These stocks include Airbnb and Doordash – companies that are still large and involved in the next wave of innovation and growth.
• An equal weight ETF (EUSA) can also help moderate mega cap exposure within a U.S. equity allocation as it gives companies like Target the same weight as Apple, as an example.

Whether you see this unique environment as an opportunity to increase exposure to some of the leading companies or as a reason to diversify, iShares offers the tools to help you express your investment views.