Chamath Palihapitiya Says S&P 500 index ETFs Need To Be 'Fixed' Or They Will End In 'Disaster' — Here Is What The Billionaire Investor Said

Financial market participants who prefer to invest in exchange-traded funds for their diversification benefits could be “in for a rude awakening,” says this venture capitalist, as the top ten stocks in the S&P 500 represent 40% of the index market capitalization.

What Happened: Chamath Palihapitiya, the billionaire investor, and former Facebook executive, explains that greater concentration in a few stocks increases the risks of investing.

He highlighted the inequality in the weight of the stocks within the S&P 500 index in an X post on Sunday and said, “If there is any market volatility, the lack of diversification could cause massive impairment.”

Kevin Gordon, the director and senior investment strategist at Charles Schwab shared a graphic showing the same.

However, this holds true for ETFs mirroring S&P 500’s weights. Spencer Hakimian, the founder of Tolou Capital Management, replied, to Palihapitiya’s post and said that “Equal weight ETF's are always available.” However, such ETfs also come with their rebalancing and tax costs,

See Also: Palantir Nearly 3X More Expensive Than Industry Average: PLTR Stock Zooms Over 395% Amid Overbought Conditions

Why It Matters: The following are the top ten stocks by index weight within the S&P 500 index. These stocks include the ‘Magnificent Seven’ stocks with various classes of their shares, along with Broadcom Inc (NASDAQ:AVGO) and Berkshire Hathaway (NYSE:BRK). The information technology sector has the highest weightage among the top 10 S&P 500 constituents.

For a market capitalization-weighted index, the weights are typically proportional to a company’s market cap, giving larger companies greater influence. However, an equal-weighted Index assigns the same weight to each constituent stock, regardless of its market size.

The S&P 500 Index has outperformed the S&P 500 Equal Weight Index this year and the same is the case with the ETFs tracking these indices. The SPDR S&P 500 ETF Trust (NYSE:SPY) was up 25.89% this year, while the Invesco S&P 500 Equal Weight ETF (NYSE:RSP) gained only 11.94% in 2024.

Photo by TechCrunch on Flickr

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