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“What did the market do today?”

“How about that market?”

“That market is really something, eh?” 


These are common questions, but here’s a better one: To what “market” are you referring? U.S. or international? Stocks or bonds? Crypto? Or real estate, perhaps?

If we truly want to discuss the “market”, we need to define it, and one way to measure the performance of a particular market is by looking at an index. Any index owns a basket of securities that are intended to represent a given market. There are many, many indexes: stock market indexes, bond market indexes, U.S. based and international indexes, and even indexes of other asset classes such as real estate or commodities.

U.S. Stock Indexes: Looking Under the Hood

Some of the most popular stock indexes quoted in the U.S. are the S&P 500, the Dow Jones Industrial Average (DJIA), the Nasdaq Composite, and the Russell 2000. All of these provide industry-standard benchmarks that are often quoted to reflect the performance of stocks in the United States. However, when you look under the hood, these indexes are quite different.

The S&P 500 and the Dow Jones Industrial Average are considered indexes of larger U.S. stocks.  The Nasdaq holds a broader mix of stocks though with a technology sector focus, and the Russell 2000 holds many smaller companies.

We have provided two tables below which show the breakdowns of the top-five holdings and sector weightings of these four stock indexes as of July 31, 2021:

Top-Five Holdings

S&P 500 Dow Jones
Industrial Average
Nasdaq Composite* Russell 2000
Type of Index Cap-Weighted Price Weighted Cap-Weighted Cap-Weighted (Rebalanced)
Apple 6.1% UnitedHealth Group 8.0% Apple 10.3% AMC Entertainment 0.7%
Microsoft 6.0% Goldman Sachs 7.3% Microsoft 9.1% Intellia Therapeutics 0.4%
(classes A+C)
4.4% Home Depot 6.4% Alphabet
(classes A+C)
7.1% Crocs 0.3% 4.0% Microsoft 5.7% 7.1% Asana 0.03%
Facebook 2.3% 5.0% Facebook 3.6% Lattice Semiconductor 0.3%
# of Index
in Top-Five Holdings
22.7% 32.5% 37.2% 2.0%

Sources:,,, and Fidelity
all data as of 9/20/21, unless otherwise noted
*data as of 7/31/21

Sector Exposures

S&P 500 Dow Jones
Industrial Average
Nasdaq Composite Russell 2000
Communication Services 11.4% 4.5% 17.3% 3.4%
Consumer Discretionary 12.3% 14.0% 15.7% 11.6%
Consumer Staples 5.8% 7.5% 3.4% 3.2%
Energy 2.5% 1.8% 0.4% 4.1%
Financials 11.0% 16.4% 4.8% 14.8%
Health Care 13.5% 16.7% 10.0% 20.8%
Industrials 8.0% 15.4% 4.1% 14.5%
Materials 2.5% 1.1% 0.3% 3.6%
Real Estate 2.7% 0.0% 1.0% 7.0%
Technology 27.9% 22.5% 42.2% 14.4%
Utilities 2.5% 0.0% 0.7% 2.5%
Other 0.2% 0.2%
100.0% 100.0% 100.0% 100.0%

Source: as of 9/20/2021

From these two tables above, we can make several observations:

First, there is 100% overlap in the top-five holdings between the S&P 500 and the Nasdaq Composite, and they are all technology stocks. However, only Microsoft is a top-five holding across the S&P 500, DJIA, and Nasdaq.

Another observation is around concentration of top weighting in these indexes.  The top five of the Nasdaq represents 37% of the entire index vs. 23% of the S&P 500 and 32% of the DJIA. The Nasdaq Composite over its history typically had higher representation in the technology sector, which currently is 42% of the index vs. 14% of the Russell 2000, 22% of the DJIA and 28% of the S&P 500.

The small-cap Russell 2000, by contrast, is far less concentrated at 2% among its top-five holdings. This means its performance is far less dependent on the performance of its top holdings compared with the other indexes listed above. That said, the Russell 2000 also comprised much smaller companies, which carry their own business-specific risks and can be more volatile as an asset class.

Generally speaking, the more concentration in the index, the greater the potential risk.

Are all indexes created the same way?

Cap-Weighted vs. Equal Weighted vs. Price-Weighted Indexes

Now, for a deeper dive. The S&P 500 and Nasdaq Composite Indexes are so-called “market-capitalization weighted”, or simply “cap-weighted”, indexes. This means that the largest companies, by market capitalization, have the most weight in the index. A simple way to think of stocks held in cap-weighted indexes is as if they are slugging it out in some kind of survival of the fittest: The best performers win and rise to the top over time.

Stocks in a cap-weighted index are directly tied to the market capitalization or size of the companies. Market capitalization represents the number of shares outstanding in the company multiplied by its stock price. So, all else being equal, (ceteris paribus for those fans of classical Latin) the better the performance of a stock over time, the bigger its market capitalization, which leads to bigger weightings in the index.

What if instead of weighting each holding by size, we could equal-weight them, so that there were fixed equal percentages of all stocks in the index, with the objective of reducing these concentration risks caused by market appreciation in the stocks? The result: a very different looking index, especially among the top holdings:

Top-Five Holdings

S&P 500 S&P 500
Type of Index Cap-Weighted Equal-Weighted
Apple 6.1% Devon Energy 0.3%
Microsoft 6.0% Diamondback Energy 0.3%
Alphabet (classes A+C) 4.4% CF Industries 0.3% 4.0% ConocoPhillips 0.3%
Facebook 2.3% Marathon Oil 0.3%
# of Index
in Top-Five Holdings
22.7% 1.3%

Sources:, Morningstar
all data as of 9/20/21

Yet another option is a “price-weighed” index, such as the DJIA, comprised of only 30 stocks. The weighting of a stock in a price-weighted index is a function of its stock price relative to the other constituents. Higher-priced stocks have more influence than lower-priced stocks. For example, a $100 stock will have twice the impact of a $50 stock, regardless of the market capitalization, and companies in the DJIA with higher absolute stock prices have the most influence.

A World of Indexes

To this point we have focused on U.S. stock indexes because the names and terminology are familiar. But indexing is not just a United States or stock-market-centric phenomenon.

There are indexes across a variety of other global markets and asset classes. The concepts discussed above, however, still hold true whenever analyzing an index: It is always a good idea to look under the hood and determine the differences and potential concentration risks from the standpoint of both sectors and top holdings.

Bond indexes can be trickier than stock indexes due to liquidity. Corporate bonds especially do not offer the same level of liquidity — or ability to easily sell the bond without affecting its price — as most stocks do.

For this reason, many bond indexes can see short-term dislocations in price during periods of selling pressure because fund managers cannot sell positions fast enough to keep up with redemptions. This is another risk factor that is specific to bond indexes because fewer than 25% of seasoned corporate bonds have at least one trade during the average day and the other 75% of seasoned bonds do not trade at all during the day typically[i]. The same can hold true in certain international and emerging markets, where liquidity can be much thinner than in the U.S. for both bonds and stocks.

What Is the Right Index to Use?

There is no right or wrong answer to this question. As we can see from the history of the S&P 500 holdings, top holdings and weightings can shift around from period to period, but over time, any short-term volatility these dynamics might create are eventually balanced out through the long-term performance of all the index’s constituents.

So, when the question is asked, “How did the market do?”, the first follow-up question may be, “Which market?” The second may be “It depends.


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