You may have more of your portfolio invested in technology stocks than you realize.
Based on market capitalization, tech currently represents 25 percent of the S&P 500. So if you own a typical S&P index fund, one-quarter of that money is invested in tech stocks. That is the largest single weighting of the 11 sectors in the U.S. market's benchmark index and nearly twice as large as the next largest component.
In other words, the S&P 500 may be diversified, but it's nowhere near equal in its representation of economic industries. The smallest slices of the American economic pie (telecom, materials, real estate) are less than 3 percent each of the S&P 500, and that's sensible. Certain industries are greater contributors to our total economic output and justify larger weightings in the U.S. stock market.
These weightings change over time. In 1998, tech represented less than 18 percent of the S&P 500. A year later, the dot-com craze inflated that weighting above 29 percent. After the bubble burst, tech shrank to less than 15 percent of the S&P 500 by 2002.
Tech is a bigger driver of the American economy today than it was 20 years ago. The Bureau of Labor Statistics estimated that high-tech industries produce 23 percent of our gross domestic product. By that measure, tech's current market cap appears proportional to the economy.
That said, it's impossible to ignore tech's outperformance in 2017. Year-to-date through Nov. 30, the tech sector increased 39 percent, more than double the return of the S&P 500 over the same period. As a result, tech's weighting grew from 21 percent a year ago to 25 percent currently. No other sector saw its weighting increase more than 0.4 percent in that time.
Are these signs of another tech bubble? It's impossible to know for sure. Tech companies do generally offer higher growth rates and deserve to trade at higher premiums. But they have also benefited from market conditions that will not always work in their favor.
In recent years, growth stocks have been in favor while value stocks have languished. The growing popularity of index funds has increased demand for companies with the largest market-caps (four of the five biggest are tech stocks). And investor enthusiasm, currently sky-high, tends to reward recent winners more than attractive valuations.
Even if our current economy justifies a heavier weighting to tech than we've seen historically, many tech names will be more vulnerable in a market correction if only because they represent a disproportionately large slice of the index.
Savvy investors may decide it's better to be early than late in adjusting their tech weightings.
Ben Marks is the chief investment officer at Marks Group Wealth Management, Minnetonka.
