FOR INSTITUTIONAL INVESTOR USE ONLY

This site is for Institutional Investor use only and not for public use or distribution. The information contained on this site is for informational purposes only without regard to the investment objective, financial situation or specific needs of any particular investor. It is not intended for use by institutional investors in a jurisdiction where distribution or purchase is not authorized.

An “Institutional Investor” means any:

  • bank, savings and loan association, insurance company or registered investment company;
  • investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions);
  • person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million;
  • governmental entity or subdivision thereof;
  • employee benefit plan, or multiple employee benefit plans offered to employees of the same employer, that meet the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and in the aggregate have at least 100 participants, but does not include any participant of such plans;
  • qualified plan, as defined in Section 3(a)(12)(C) of the Exchange Act, or multiple qualified plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans;
  • FINRA member or registered person of such a member; or
  • person acting solely on behalf of any such institutional investor.

By accessing this site you confirm that you are an Institutional Investor, you agree not to forward or make the contents of this site available to any person who is not an Institutional Investor, and you agree to be subject to Victory Capital’s user agreement

Redirect me to VCM.com

Thank you for your interest in Victory Capital Management. To download this document, please complete the registration form below. You will only need to complete this form one time to access site content.






  • Victory Capital may use my email to send out periodic news, announcements, and product information.

*All fields are required
Submit

Exit stage left: When mega-caps fall out of favor

If you were to flip on your favorite financial news site, the odds of hearing mention of Facebook, Apple, Amazon, Netflix or Google are close to 100%. Indeed, there’s no shortage of media attention heaped on the mega-cap darlings of the S&P 500® Index. We even have pet names – FAANG, for example – to make it easy and trendy to reference these stocks.

But remember, the largest stocks in a cap-weighted index are not permanent fixtures, and the spotlight will not always shine brightly on them. So when mega-caps fall out of favor, they will act as a performance anchor for any passive investment that tracks the index. That’s just how cap-weighted indexes like the S&P 500 work.

Given that reality check, investors may want to question whether these popular stocks merit an overweight investment. Another way of putting this: Do the mega-cap headline-grabbers of today represent the best opportunity for our investing dollars in the future?

To answer this question, we look at the mega-cap stocks of yesteryear and see how they have performed (and changed) over time. The table below shows the 10 largest stocks in the S&P 500 as of 20 years ago and their annualized total return, as of December 31, 2018:


Only three out of the 10 largest stocks in the S&P 500 in 1998 produced a larger total return than the S&P 500 over the subsequent 20 years. Of these three, only Microsoft materially outperformed the entire index. The remaining seven stocks all underperformed the S&P 500 by at least a full percentage point, annualized. Even GE—once considered one of the brightest and most diversified stars in the index—has fallen on hard times and would have lost almost 60% of your starting investment during that 20-year stretch.

If you still think that following the cap-weighted S&P 500 is the best way to make a large-cap allocation, consider looking at the composite performance of the top 10 stocks in the S&P 500 over time. The chart below shows cumulative returns of the 10 biggest market caps in the S&P 500 (rebalanced quarterly) versus the entire index:

 

Mega Cap Graph


Again, the mega-caps don’t shine so brightly in this light. Since 1990, the top 10 stocks as a group have underperformed the S&P 500 index by more than 190 basis points annualized. A starting investment of $100 in the top 10 stocks alone would have grown to $824, while that same $100 would have grown to $1,356 for the entire index.

To put this in context, let’s look back at the best performing stocks of the last 20 years. Out of the 100 highest returning stocks of the S&P 500 of the last 20 years, the following emerges:*

• Only one of the 100 highest-returning stocks was in the 50 largest market caps of the S&P 500 in 1998.
• Of the 100 best performing names in the S&P 500 over the last 20 years, almost one-third (31) weren’t even in the S&P 500 index 20 years ago.

In summary, mega cap stocks may continue to outperform in the short term, as they have in recent years. The media can continue to give them cute acronyms. And investors can follow the all the nuances of today’s hot mega-cap technology stocks. But remember, these darlings may not always outperform. Spreading risk (and capital) more evenly across all constituents may prove to be a better approach for a core equities allocation than fixating and over-allocating to mega-caps.

 
*Source: FactSet. Data was computed by examining the largest cumulative total return for all stocks in the S&P 500 Index for any part of the 20-year period. The cumulative total return calculation in FactSet captures the total return of each stock while it was a part of the S&P 500 Index. 

An index is unmanaged and not available for direct investment; therefore its performance does not reflect the expenses associated with the active management of an actual portfolio.

The views are as of the date published and are subject to change. This material is provided for informational purposes only and may not be used or construed as investment advice or a recommendation to take any particular investment action. There is no guarantee that the information supplied is accurate, complete, or timely.

©2019 Victory Capital Management Inc.
Consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Download a prospectus or summary prospectus, if available, containing this and other important information for USAA mutual funds from www.usaa.com/prospectus, for Victory mutual funds from www.victoryfunds.com, or for VictoryShares and VictoryShares USAA ETFs from www.victorysharesliterature.com. Read it carefully before investing.

Investments involve risk including possible loss of principal. The value of the equity securities in which the fund invest may decline in response to developments affecting individual companies and/or general economic conditions. Dividends are never guaranteed. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty, and greater volatility. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. You may lose money by investing. There are no guarantees the funds will achieve their investment objectives and strategies may be unsuccessful.

Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

ETFs have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited and often commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. There can be no assurance that an active trading market for shares of an ETFs will develop or be maintained. The ETFs are not actively managed and may be affected by a general decline in market segments related to the Indexes. The ETFs invest in securities included in, the Index, regardless of their investment merits. The performance of the ETFs may diverge from that of the Indexes. 

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

LinkedIn, Twitter, and any other social media platform are owned by third parties unaffiliated with Victory Capital. Victory Capital is not responsible for the privacy or security policies at these sites or other third party sites to which they provide further links. For Victory Capital’s privacy policy, please visit the Policies page on www.vcm.com. Please do not post any information you wish to keep private on this page.

Victory Capital does not endorse and is not responsible for any ads, content, products, advice, opinions, recommendations or other material of third party sites that may be promoted via advertising within social media properties.

This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such.  Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Victory Capital means Victory Capital Management Inc., the investment manager of the USAA Mutual Funds and VictoryShares USAA ETFs. Victory Mutual Funds and USAA Mutual Funds are distributed by Victory Capital Advisers, Inc. (VCA). VictoryShares ETFs and VictoryShares USAA ETFs are distributed by Foreside Fund Services, LLC (Foreside). VCA and Foreside are members of FINRA and SIPC. Victory Capital Management Inc. (VCM) is the investment adviser to the Victory Mutual Funds, USAA Mutual Funds, VictoryShares ETFs, and VictoryShares USAA ETFs. VCA and VCM are not affiliated with Foreside. USAA is not affiliated with Foreside, VCM, or VCA. USAA and the USAA logos are registered trademarks and the USAA Mutual Funds and USAA Investments logos are trademarks of United Services Automobile Association and are being used by Victory Capital and its affiliates under license.

Nasdaq is a registered trademark of Nasdaq, Inc. and its affiliates (together,“Nasdaq”) and is licensed for use by Victory Capital. The product(s) are not issued, endorsed, sold, or promoted by Nasdaq. Nasdaq makes no warranties as to the legality or suitability of, and bears no liability for, the product(s). Nasdaq is not affiliated with a fund or advisor.

For specific questions about your account or other customer-service related inquiries, please contact Victory Capital directly.