October 4, 2018

ETF Index Error 4: Index-Funds are the market

In 2017, the index of the 500 biggest stocks in the US, the Standard & Poor’s 500, was dominated by just five stocks that even have a name now: They are the FAANG stocks - Facebook, Apple, Amazon, Netflix, and Google.

The FAANG made up almost 30% of the returns of the mighty S&P 500. However, this is not a broadly based result, but a highly concentrated one: If you invested in the S&P 500, you didn’t invest in the US economy, but in technology stocks.

This differentiation is important. Another example: Well over half of the world's MSCI World index is US equities, 30% technology and healthcare companies, and 20% financial companies. This is not the world economy, but a not very representative and rather arbitrary selection of it. The same applies to the S&P 500, the DAX and the Swiss SMI. How little index funds map the actual market is shown in our free Investing Guide.

Source: FAANG Analysis from Marketwatch

ETF Index Error 1 ¦ ETF Index Error 2 ¦ ETF Index Error 3

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