When I was going through the training program at Group One, we hedged every single trade. That was the whole job.
So if you bought calls and then accidentally bought stock at the same time, somebody would call you Tex. Because you weren't hedged. You'd gone big in the same direction twice and told yourself you were being careful.
I can say this now because I live in Texas, so I'm allowed.
Here's why I bring it up. If you're sitting at home looking at your retirement and you own an S&P index fund and a Nasdaq 100 fund, you are Texas hedged and you probably don't know it.
Let me show you what I mean.
The best version of it I ever saw happened in the SPX pit.
Big trade goes off, and one of the market makers over in one of the little pods turns to his clerk and tells him to buy 200 futures. Guy across the room looks up and says, Phil, those are calls, not puts.
And Phil just goes, oh.
Had to reverse the entire order on the fly with the whole room watching. Getting called out for screwing up a hedge was one of the funnier things I ever saw down there, and the reason it lands is that the mistake is genuinely easy to make.
You move fast, you get the sign backwards, and now you own the same bet twice while believing you're protected.
So go look at what you actually own.
The top ten names in the S&P 500 run about 40% of the entire index now. Nearly forty dollars out of every hundred you put in a standard S&P fund lands in ten companies, and Nvidia by itself was running close to 13% of the thing earlier this year. Then pull up the Nasdaq 100 and it's the same names sitting on top, in an index that's 50 to 60% technology by weight.
If you own both and think you've spread yourself out, no. You're not diversified at all. You literally just own the same thing.
There's a number that settles this and it came out in March.
The twelve-month rolling correlation between the S&P 500 and the Nasdaq 100 hit 0.98. All-time high.
Those two indexes are moving in near lockstep, which means the second fund in your account is doing almost nothing the first one wasn't already doing for you.
It wasn't always this way either. That correlation ran around 0.6 in the mid-90s, climbed through the 2000s, and sat near 0.9 for a stretch before it started trending higher again around 2017.
Nobody made a bad decision here. The index changed underneath everybody.
The part that actually got my attention is what happened on the other side of that.
Over the same period, the S&P 500's correlation to its own equal weight version has been falling, and it's down around 0.8 now.
So the S&P is currently more correlated to the Nasdaq 100 than it is to a fund holding the exact same 500 companies in equal amounts.
That's the whole problem in one sentence.
I've moved my entire retirement out of SPY and into RSP, the equal weight version.
The management fee runs a little bigger and I'm fine with that. Instead of ten stocks controlling 40% of my assets, those 500 names get distributed much more evenly.
The part most people never think about is the second thing equal weight does for you.
RSP owns the same eleven sectors SPY owns. It starts the year with the same money in each of them and lets them run, and at the end of the quarter it sells the winners and buys the losers to get back to even.
It's actively portfolio managing for you.
On a schedule, without you having to find the discipline to trim something that's been working, which almost nobody has.
And historically, up until roughly the last ten years, equal weight generally did outperform. The rebalancing effect is a big piece of why.
What broke that pattern is the same thing that created the concentration problem. A handful of enormous names ran away from the field, and everybody's index fund quietly turned into a bet on ten companies.
I'm not telling you to sell anything right now.
Pull up both funds and look at the top holdings side by side. If it's the same names sitting at the top of both lists, you already know what you've got.
Your only option,
Mark Sebastian
P.S. The Fed announces tomorrow at 2:00 PM ET, and I'll be live with Garrett covering it as it hits. This is not one of those meetings where everybody already knows the answer, despite all the rumors floating around the internet. We’ll be breaking it down in real-time, the translation, the reaction, and how to position for what’s next. Join us here.