While investors have been cheering the performance of the Nasdaq (QQQ) this year they should be wary of concentration risk which is becoming more apparent in the top 5 names.
Concentration risk emerges when a small portion of stocks account for an outsized portion of an ETF or fund. The danger occurs when the broader market stocks fail to follow through and those stocks with outsized holdings turn, leaving the index at the mercy of a few stocks.
The Nasdaq has reached that point with the top 5 stocks now accounting for 40.5% of the overall index as shown below.
(Percentages as of March 14, 2012)
- Apple (AAPL) 15.05%
- Microsoft (MSFT) 8.73%
- Google (GOOG) 6.61%
- Oracle (ORCL) 5.17%
- Intel Corp. (INTC) 4.94%
The performance of Apple, Microsoft, Oracle, and Intel have been driving the index this year on hopes that the economic recovery will create a new replacement cycle and demand for Intel, Microsoft, and Oracle products.
Apple and Microsoft in particular have seen their stocks rise at a staggering slope with Apple leading the way.
The issue of concentration risk looms large in the markets as a small number of stocks are leading the overall market rally. As fund managers and investors attempt to chase performance more money piles into an increasingly smaller number of stocks creating a momentum based parabolic move that leaves those buyers at the top holding the bag.
To put this into further perspective, on Wednesday more than 50 million Apple shares were traded for a dollar volume of close to $30 billion dollars. The dollar volume for the entire month of February on the NYSE was only $36.6 billion dollars and near $50 billion for the Nasdaq.
Now with the first quarter coming to a close and the NASDAQ tagging a 15% gain YTD it would be prudent for investors to look to take money off the table. More aggressive investors may want to consider the ProShares Short QQQ (PSQ) in order to play a decline or hedge their gains for the year.
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