Has The S&P 500 Become A Tech Index?

Over the past decade, the S&P 500 has gradually been dominated by tech firms to the point where some analysts are calling it a tech index.

Technology, as a sector within the index, is almost as large as the second and third largest sectors combined. In as much as we’ve had the dot-com bubble of the past, technology companies are back, and they’re back in a big way.

Five technology companies account for over 15 percent of the S&P 500 index. It’s therefore not a surprise that many feel that the S&P 500 is a tech index.

So why does it matter if the S&P 500 is a tech index?

There are two reasons: the bubble prospect and diversification.

The bubble prospect is simple. As the name suggests, the idea is that valuations of tech companies may simply be wrong, and they are currently overvalued. If this is the case, this bubble will pop and will create major downward pressure on the S&P 500.

When eight tech companies account for 122 percent of the S&P 500’s total returns for the 12 months to July 2018, it’s no surprise that people think we might be in bubble territory. And let us not forget that we have been here before with the dot-com crash.

The second reason it matters, and arguably the most important one for the investor, is the concept of diversification.

It is risk management 101 to diversify your portfolio. You could do this by using different index funds, different countries or targeting different sectors. However, the issue is that people often don’t have perfect information and may use a fund of funds.

These products have become more popular in recent times due to their relative cheapness with Vanguard LifeStrategy, for instance, charging just over 0.2 percent per year in fees. However, the issue with this is that indexes such as the S&P 500 don’t offer as much diversification as the investor might be looking for.

This is due to the scale of the tech sector within the index. This is why some commentators have called the S&P 500 a tech index.

What about smaller tech companies?

So far, I have focused on your household names such as Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Google (NASDAQ:GOOGL). The reality is that even though they dominate the S&P 500, the tech industry, as a whole, is booming.

There’s been no shortage of smaller tech startups that are disrupting the tech industry while sending shockwaves through stock markets in the process. Startups like GoShare, for instance, is helping disrupt the transport industry by attempting to solve the old problem of ads on Gumtree or Craigslist saying “collection only”. If you didn’t have a van or a truck, you missed out.

Another platform, RockHer, is helping disrupt the ecommerce industry via its proprietary AI-powered gemologist, ROSI. The AI-powered algorithms behind this platform can help match made-to-order rings perfectly, thus providing a simple solution to a problem that we have all experienced at some point during our lives.

These are just a few examples in a long list of smaller startups that are having an impact on the Valley, and even a broader impact on stock markets.

Is this just a U.S. phenomenon?

While the U.S. is famous for the Valley and its tech industry is flying, the sector is also booming elsewhere.

We only have to look at one of America’s closest allies, the United Kingdom, to see how well the tech industry is doing elsewhere.
In the UK, the tech sector grew by 4.5 percent in the last 12 months – a total of £14 billion in growth. As a result, jobs in the tech sector are growing five times faster than any other sector in the country.

Unlike the U.S., however, tech growth in the UK isn’t just focused in one area like Silicon Valley. Instead, it is quite spread out across the cities of Leeds, London, Edinburgh, and Manchester. Whatever happens, the tech industry has certainly shown that it likes to grow, and it likes to grow quickly.