When legendary investor Jack Bogle created the index fund in 1976, he saw it as a way to help ordinary Americans share in the riches of the entire U.S. stock market.
This year, index fund investors are making money all right. But it's come with some risks: Much of the gains are due to half a dozen ultra-hot technology stocks.
Apple, Amazon, Microsoft, Facebook, Netflix and Alphabet (Google's parent company) have been soaring in recent months. They've been responsible for more than a quarter of the increase in the S&P 500 index since March. The index hit a record high this week, recovering all of its losses from the market plunge that occurred when the coronavirus pandemic slammed into the U.S. economy.
Loading...
The average stock in the index has actually lost 4% since the low on March 23, says Mark Hackett, chief of investment research at Nationwide. But these tech superstars have done so well that they've propelled the entire index up by 52%, despite an economy that's limping along.
The gains have been staggering. If you weren't invested in these six stocks in recent years, the chances are you lost money. Apple shares alone have risen so much that the company's market capitalization hit $2 trillion this week.
The dazzling performance reflects the importance these companies have come to play in the lives of people all over the world, says Aswath Damodaran, professor of finance at New York University's Stern School of Business.
You can debate whether that's a good thing all you want, Damodaran says.
"But the market is not a morality play. It's reflecting the reality, which is these companies essentially are the companies that make the world go 'round," he says.
"In terms of the broad economic changes, these companies are on the right side of history," adds Lu Zhang, a professor of finance at the Fisher College of Business at Ohio State.
Damodaran agrees. He says just look at how many hours of the day the average person spends engaging with one of these companies. He's seen it in his own life. "As I go around the house, I realize how dependent I've become on these six companies," he says.
And that's especially true for millions of people who are working or learning from home during the pandemic.
But the lopsided nature of the stock market rally presents potential problems for investors.
The fund started by Bogle purchased shares of the 500 biggest and most important U.S. companies, enabling investors to own a basket of stocks that would reflect the economy as a whole.
Because the fund was diversified, it was safer for investors. And the fund had no highly paid manager picking stocks, so it could operate almost on autopilot. That made it less expensive to buy into.
As a result, index funds have became tremendously popular, with tens of millions of people entrusting their retirement funds to them.
In the past, index funds have often been dominated by a few large companies, Damodaran says. But Hackett says the top stocks now play a bigger role in the index than any time since at least 1980.
That means huge numbers of ordinary people have staked their retirement funds on how these six tech stocks do.
No one is writing off companies like Apple and Google. Still, these companies have come under intense scrutiny recently.
Several are under investigation by Congress, where there are calls to break them up. Just last month, heads of the four largest tech companies were in the hot seat, testifying in Washington.
All that raises questions about how long their lofty stock prices will hold up.
Copyright 2021 NPR. To see more, visit https://www.npr.org. 9(MDEwMTk5OTQ0MDEzNDkxMDYyMDQ2MjdiMw004))
