“Why Don’t I Own (More) Apple?”

John Osbon - August 31, 2011

Pretty much everybody wants to own Apple (AAPL). And why not?  AAPL is up 55 times since its March 2003 low of $7 and has greater cash reserves than the US government. Plenty of investors are lamenting that they didn’t take a bite of Apple years ago. But here’s the good news. If you are an indexer, chances are you own a lot of AAPL.  Here’s how.

A big stock in biggest ETFs

A quick look at the holdings of the largest index exchange traded funds (ETFs) reveals that Apple is a staple of many of the largest funds.  Apple is the second largest holding, at just over 3 percent, in the two largest S&P 500 ETFs, SPY and IVV, just behind ExxonMobil.  Indeed, Apple and ExxonMobil have been trading places as “the world’s most valuable company” over the summer, depending on their respective closing day prices.

APPL is also the number one holding in QQQ, the NASDAQ 100 index ETF, at 13%, and number two in VTI, Vanguard’s total stock market ETF.

These and most of the biggest and most popular equity index funds are capitalization weighted: the most valuable companies have the highest weighting. So if you own these ETFs or many other large cap or technology index funds, you likely own Apple.

 Skill or just luck?

Some might call that lucky – owning a high flyer like Apple without specifically choosing it from the thousands of publicly traded companies. I completely disagree. If skill is disciplined, practiced and repeatable, that describes indexing to a tee. I feel today’s most skilled investors are those who carefully build a portfolio of index investments based on their own personal goals and risk tolerance.

I see luck, on the other hand, as picking a stock before it goes up and selling it before it falls again. Good luck happens, but so does bad luck, and I don’t see that as sound basis for investing for your family’s future.

Who knew?

The beauty of indexing is that you don’t need to make lucky stock picks to own companies like Apple. As the company’s market capitalization grew since 2003, the big index ETFs bought more and more of it – by rule, not luck.

And keep in mind, it would have been a pretty lucky pick to buy Apple in 2003. Here’s a fascinating story from the Harvard Business School newsletter in early 2004 that describes many reasons why Apple is a cool company but one not positioned to be a big factor in the computer market. The article doesn’t once mention the words “smart phone,” “mobile app,” or “tablet computer” and describes iPod and iTunes as fairly weak offerings on which to build a company. Oh well.

If you own a variety of indexes, you likely own Apple.  And just as importantly, you will own the next Apple a generation from now, even if it’s a company operating out of a dorm room or garage today.

 


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Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Any securities listed in this article are for illustrative purposes only. These securities may or may not be held in actual client accounts. Specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable.

An investment cannot be made directly in an index.

 

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