I found the following claim by Jeff Sommer in the G&M to be of interest (bolding added by jiH):
In the course of the artificial intelligence boom, big tech companies like Nvidia, Microsoft, Alphabet, Amazon, Broadcom, Meta and Tesla have risen so much that the market has breached a long-standing legal threshold: It is no longer diversified, by the Securities and Exchange Commission’s traditional standard. The U.S. stock market has become more highly concentrated than it has been since the 1960s, and investors are taking greater risks than they may realize.
This might be correct, but it depends on interpretation. Maybe. Mr. Sommer did not actually specify the precise rule he’s looking at or just how the S&P breaches it. But anyway, according to Investment Company Act of 1940:
‘‘Diversified company’’ means a management company which meets the following requirements: At least 75 per centum of the value of its total assets is represented by cash and cash items (including receivables), Government securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 per centum of the value of the total assets of such management company and to not more than 10 per centum of the outstanding voting securities of such issuer.
Right now, both Nvidia and Apple comprise over 5% of the S&P 500, so maybe that’s the justification for the statement.
But on the other hand, only 75% of the value of the company has to meet this test. So one could argue that of the 7.18% of the S&P 500 represented by Nvidia, 5.00% can go in the 75% bucket, while the remaining 2.18% can go in the non-75% bucket and everything is hunky dory.
Apparently, though, this is not argued. In an earlier column (published in the NYT, but not in the G&M), Mr. Sommer writes:
I was aware of these numbers but didn’t connect them directly to the issue of portfolio diversification. A reader brought this problem to my immediate attention recently. Fidelity Investments had sent her and other fund shareholders a letter saying that since Nov. 10, two major index funds, Fidelity 500 and Fidelity Total Market, were operating as “nondiversified funds.” She wanted to know whether the funds had changed in an important way. Why weren’t they still diversified?
When I looked into it, I found that the funds themselves haven’t shifted their approach one iota. In an emailed statement, Fidelity said, “The benchmarks of those funds remain the same.” They are still carefully tracking the stock market, as they have since their inception.
Instead, what has changed is the U.S. stock market itself. It has become so top-heavy that index funds mirroring the overall market are breaching legal thresholds for diversification set by the Securities and Exchange Commission to protect investors. Fidelity was merely notifying its customers that it was making a legal adjustment in its funds acknowledging this shift — something, as I learned, that Vanguard, State Street, BlackRock and other companies with similar funds had already done in their own legal filings.
…
As Vanguard puts it in the prospectus of its Vanguard 500 Stock Index Fund, investors now need to be aware of “nondiversification risk.”“Because the fund seeks to closely track the composition of the fund’s target index,” the prospectus says, “from time to time, more than 25 percent of the fund’s total assets may be invested in issuers representing more than 5 percent of the fund’s total assets due to an index rebalance or market movement, which would result in the fund being nondiversified under the Investment Company Act of 1940.”
According to the factsheet for Fidelity 500, at year end only three issues exceeded 5% of holdings: Nvidia, 7.74%; Apple, 6.86%; and Microsoft, 6.14%. Not 25%, but close enough that a little bit of legal caution is warranted!
Pikers. I can remember when Nortel was more than 25% of the TSX Index! Did we flinch? No. Did we diversify? No. As the man might say, those would be the actions of radical extreme left-wing communists and we scorned such timidity!
The New York Fed published SURVEY OF CONSUMER EXPECTATIONS:
January Survey: Earnings, Job Loss, and Job Finding Expectations Improve Modestly; Inflation Expectations Lower at Short-Term, Unchanged at Medium- and Longer-Term Horizons
- Median inflation expectations in January declined by 0.3 percentage point (ppt) to 3.1 percent at the one-year-ahead horizon and remained steady at 3.0 percent at the three-year and five-year-ahead horizons.
- Median one-year-ahead earnings growth expectations increased in January by 0.2 ppt to 2.7 percent. The increase was driven by those with a household income under $50,000.
- The mean perceived probability of losing one’s job in the next twelve months decreased by 0.4 ppt to 14.8 percent, remaining slightly above the trailing 12-month average of 14.6 percent. The mean perceived probability of finding a job in the next three months if one’s current job was lost increased by 2.5 ppts to 45.6 percent, remaining below the trailing 12-month average of 48.6 percent.
- Perceptions about households’ current financial situations deteriorated with a larger share of respondents reporting a worse financial situation compared to a year ago. Year-ahead expectations about households’ financial situations also deteriorated, with a smaller share expecting to be better off a year from now and a larger share expecting to be worse off.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1244 % | 2,481.3 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1244 % | 4,704.9 |
| Floater | 5.81 % | 6.03 % | 55,666 | 13.82 | 3 | 0.1244 % | 2,711.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0865 % | 3,672.2 |
| SplitShare | 4.75 % | 4.52 % | 85,246 | 3.03 | 5 | 0.0865 % | 4,385.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0865 % | 3,421.7 |
| Perpetual-Premium | 5.67 % | 5.60 % | 557,129 | 6.77 | 7 | -0.0170 % | 3,077.7 |
| Perpetual-Discount | 5.57 % | 5.63 % | 50,808 | 14.41 | 27 | -0.1272 % | 3,401.9 |
| FixedReset Disc | 5.93 % | 5.93 % | 112,125 | 13.73 | 28 | 0.0969 % | 3,177.0 |
| Insurance Straight | 5.45 % | 5.55 % | 66,753 | 14.49 | 22 | 0.1935 % | 3,336.7 |
| FloatingReset | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0969 % | 3,779.3 |
| FixedReset Prem | 5.97 % | 4.62 % | 85,111 | 2.52 | 20 | -0.0058 % | 2,657.3 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0969 % | 3,247.5 |
| FixedReset Ins Non | 5.27 % | 5.47 % | 79,168 | 14.45 | 14 | 0.0705 % | 3,135.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FFH.PR.K | FixedReset Prem | -1.75 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2027-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 4.87 % |
| PWF.PR.T | FixedReset Disc | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 23.20 Evaluated at bid price : 24.50 Bid-YTW : 5.42 % |
| CU.PR.D | Perpetual-Discount | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 21.78 Evaluated at bid price : 22.02 Bid-YTW : 5.57 % |
| CU.PR.C | FixedReset Disc | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 23.82 Evaluated at bid price : 24.25 Bid-YTW : 5.46 % |
| IFC.PR.F | Insurance Straight | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 23.88 Evaluated at bid price : 24.15 Bid-YTW : 5.55 % |
| BN.PF.J | FixedReset Prem | 1.05 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2027-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.97 Bid-YTW : 4.48 % |
| GWO.PR.H | Insurance Straight | 1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 21.87 Evaluated at bid price : 22.11 Bid-YTW : 5.55 % |
| ENB.PR.N | FixedReset Disc | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 23.34 Evaluated at bid price : 24.80 Bid-YTW : 5.88 % |
| IFC.PR.C | FixedReset Ins Non | 3.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 24.20 Evaluated at bid price : 24.74 Bid-YTW : 5.57 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BN.PR.T | FixedReset Disc | 50,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 21.44 Evaluated at bid price : 21.76 Bid-YTW : 5.93 % |
| MFC.PR.I | FixedReset Ins Non | 50,400 | YTW SCENARIO Maturity Type : Call Maturity Date : 2027-09-19 Maturity Price : 25.00 Evaluated at bid price : 25.42 Bid-YTW : 5.47 % |
| GWO.PR.N | FixedReset Ins Non | 47,600 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 18.36 Evaluated at bid price : 18.36 Bid-YTW : 5.77 % |
| NA.PR.I | FixedReset Prem | 37,000 | YTW SCENARIO Maturity Type : Call Maturity Date : 2029-05-01 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 5.16 % |
| IFC.PR.C | FixedReset Ins Non | 26,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2056-02-09 Maturity Price : 24.20 Evaluated at bid price : 24.74 Bid-YTW : 5.57 % |
| BMO.PR.E | FixedReset Prem | 25,900 | YTW SCENARIO Maturity Type : Call Maturity Date : 2028-11-25 Maturity Price : 25.00 Evaluated at bid price : 26.95 Bid-YTW : 3.77 % |
| There were 14 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| See TMX DataLinx: ‘Last’ != ‘Close’ and the posts linked therein for an idea of why these quotes are so horrible. | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.Z | Insurance Straight | Quote: 25.31 – 26.31 Spot Rate : 1.0000 Average : 0.7475 YTW SCENARIO |
| PWF.PR.T | FixedReset Disc | Quote: 24.50 – 25.00 Spot Rate : 0.5000 Average : 0.3631 YTW SCENARIO |
| FFH.PR.K | FixedReset Prem | Quote: 25.20 – 25.60 Spot Rate : 0.4000 Average : 0.2637 YTW SCENARIO |
| PWF.PR.K | Perpetual-Discount | Quote: 22.08 – 22.48 Spot Rate : 0.4000 Average : 0.2754 YTW SCENARIO |
| CU.PR.G | Perpetual-Discount | Quote: 20.50 – 21.23 Spot Rate : 0.7300 Average : 0.6113 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 14.10 – 14.46 Spot Rate : 0.3600 Average : 0.2614 YTW SCENARIO |