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The Indices Are Getting Top-Heavy Again

Michael E. Schroer, CFA

Managing Partner & Chief Investment Officer | Renaissance Investment Management


The relatively recent surge in FANGMA stocks (Facebook, Apple, Netflix, Google, Microsoft, and Amazon) has led to the Russell 1000 Growth Index reaching market-cap weighting levels it hasn’t seen in in over 20 years. What are the implications for investors as this bull market rages on?   

The extraordinary performance of the FANGMA stocks has been one of the more remarkable stories in the U.S. stock market in recent years. Their outperformance has resulted in a surge in their representation in the market-capitalization weighted Russell 1000® Growth Index, as shown below.

Weight of 10 Largest Companies in the Russell 1000® Growth Index

Data from 12/31/1984–1/31/2020
Sources: FactSet, FTSE Russell

As a result, the weight of the largest companies in the Russell 1000® Growth indices has reached historic levels. The chart above illustrates the percentage of total index weight accounted for by the 10 largest companies in the Russell 1000® Growth over time. January’s weightings of the 10 largest companies were only fractionally below the all-time levels reached in May 2001.

Following May 2001, the weighting of the 10 largest companies in each index declined, as mid-sized companies subsequently outperformed. In fact, from May 2001 to June 2007 (the point at which the weighting of the 10 largest companies reached a low point of 17.1%) the Russell Midcap® Growth Index significantly outperformed the Russell 1000® Growth Index and the Russell Top 200® Growth Index, as shown in the table below.

Russell Index Returns

May 31, 2001 - June 30, 2007

  Annual Cumulative
 Russell 1000® Growth Index1 1.9% 11.9%
 Russell Top 200® Growth Index2 0.3% 2.1%
 Russell Midcap® Growth Index3 7.0% 51.2%

Source: FTSE Russell

The 10 largest companies in the Russell 1000® Growth Index are almost by definition among the most popular companies for investors to own. However, in the current environment there might be more investment potential in considering a dose of medium-sized companies in portfolios as well.


1Russell 1000® Growth Index—The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. It is comprised of the Russell Top 200® Growth Index and the Russell Midcap® Growth Index.
2Russell Top 200® Growth Index—The Russell Top 200® Growth Index measures the performance of the especially large cap segment of the U.S. equity universe represented by stocks in the largest 200 by market capitalization. It includes Russell Top 200® Index companies with higher growth earning potential as defined by Russell’s leading style methodology.
3Russell Midcap® Growth Index—The Russell Midcap® Growth Index measures the performance of the Russell Midcap® companies with higher price-to-book ratios and higher forecasted growth values.

WRITTEN BY

Michael E. Schroer, CFA

Managing Partner & Chief Investment Officer | Renaissance Investment Management

PUBLISHED: February 6, 2020

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