The top five stocks (FAANG) now make up over 20% of the S&P 500 index, and over 40% of the Nasdaq 100. This is double the concentration at the height of the dot-com bubble as certain industries are severely impacted by the pandemic including energy, retail, and travel.
While it is not unprecedented for companies to dominate the S&P 500 (Exxon, IBM, AT&T), this time (aka Corona time) is marked by new companies quickly rising up through the ranks. Zoom now has a market cap of $50b (from an IPO valuation of $10b a year ago) and is worth more than the entire U.S. airline industry!
The S&P 500 was created in 1957 and today only 60 of the original 500 members remain. As original members have dwindled, so has the average tenure of companies in the index. In 1964, the average index tenure of an S&P 500 company was 33 years. In 2016 the tenure declined to 24 years and is expected to shrink to 12 years.
Once a quarter, the index committee determines any changes to the list of companies. To be allowed entry into the S&P 500 today, a company must have a market cap of at least $8.2b, sufficient liquidity, and consistent profitability. 30 underperforming companies may be on the chopping block this quarter, which is greater than the annual average over the last three decades and would be one of the busiest years.
With some dropping out, the committee will have to add names to the index (with the risk of including too many tech companies) which typically sends the stock up by 4-7% as passive funds pour into the stocks.
While the S&P 500 currently encompasses roughly 80% of the entire US stock market and nearly $10t in assets is benchmarked or directly linked to it, it is fair to say that, like this gentlemen’s ride, it is top-heavy.
Drastic makeover looms for world’s most followed stock index - More than 30 firms may be removed from the S&P 500, according to DataTrek. Recently removed companies have drastically underperformed including oil and gas companies (Chesapeake Energy and Transocean are still off by 80%) and retailers (Bed Bath & Beyond and Macy’s are down roughly 70%). Read more
The art and science of stewarding the S&P 500 - The index committee is comprised of 10 members who are full-time employees of S&P Global, their identities other than 2 directors are kept secret. They meet once a month to discuss the potential revisions to the index and votes are decided by a simple majority. Read more
The myth of oligarchic dominance in the S&P 500 recovery trade - While it may seem that tech and healthcare names are outperforming all the other stocks, as news of a vaccine come to light small-caps surged, cruise ship operators and hotel chains jumped more than 10% while purveyors of toilet paper and soup plunged. Read more
Apollo Agriculture - Kenya based agriculture financing platform raised $6m in Series A funding led by Anthemis. Read more
Aspiration - Los Angeles based ESG challenger bank raised $135m in Series C funding led by Alpha Edison. Read more
Brex - San Francisco based credit card for startups raised $150m in a Series C extension led by DST Global and Lone Pine Capital. Read more
Coalition - San Francisco based cybersecurity insurance startup raised $90m in Series C funding led by Valor Equity Partners at a $800m pre-money valuation. Read more
Human Interest - San Francisco based 401(k) provider for SMBs raised $10m in a Series C extension led by Glynn Capital. Read more
Khatabook - India based digital bookkeeping and payments startup raised $60m in Series B funding led by B Capital. Read more
Lingxi - China based machine intelligence for financial services raised $6.2m in Series A funding co-led by ByteDance and Rocket Internet. Read more
Spruce - New York based digital real estate closing and communications platform raised $29m in growth capital led by Scale Venture Partners. Read more
States Title - San Francisco based digital mortgage platform raised $123m in a Series C round of funding led by Greenspring Associates. Read more
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