For many decades, the key professional goal of many in the investment management industry has been to produce returns that exceed those of the S & P 500 . Recently, I've begun to question that mandate. As the S & P 500 has become increasingly concentrated in sector and weight, it is worth questioning whether it still serves as an appropriate benchmark. In sticking with the broad-market index, we could inadvertently be exposing our clients and shareholders to additional risk.
Just because an index changes weights or composition does not mean investors should assume it is less meaningful on certain measures. The S & P 500 might look more like the Nasdaq of old, with about 40% of its weight in tech and communication services, but business has moved in that direction. However, that concentration raises the vulnerability to the technology and communications sectors and their largest constituents more than some investors may desire.
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