Feb 21, 2019 3 min read

TV commercials for Capital One credit cards are a great reminder that there is often more (or less) to something than what meets the eye.

Keep this in mind when investing. Owing to their precision, tax efficiency and low cost, stock index funds have recently surged in popularity. But, just as credit card rewards programs are not all the same, neither are stock index funds. They can differ widely in performance and risk.

So, what’s in your stock index fund?

The most popular index funds are those that track the Standard & Poor’s 500. You may be tempted to think an S&P 500 index fund will deliver complete, one-stop-shopping stock market coverage within your portfolio. There are a couple of things you should keep in mind, however.

First, the S&P 500 index tracks only U.S. large-company stocks. While this group is obviously a very important part of the global economy, it leaves out many other sectors, such as small- and medium-sized companies, as well as international companies.

Second – and this is a point that many do not realize – the S&P 500 is a market capitalization weighted index. What this means is that the companies that are valued highly by the marketplace will carry more weight in the index. The higher the market cap of a particular company, the higher the weighting within the index.

As an example, this means the S&P 500 was increasingly weighted toward technology stocks in the late 1990s, and toward financial stocks in the years leading up to the 2008 financial crisis. From a portfolio performance perspective, in each case this was great on the way up, but quite painful on the way down.

On the Capital One commercials, Jennifer Garner asks us to consider a better way to gain access to frequent-flier seats. Perhaps we should ask whether there is a better way to index. Will broader index exposure offer us more of what we all desire, specifically better top-line performance and lower risk (as measured by volatility)?

Like credit cards, index funds are not created equal. Index funds that offer specific stock coverage – such as large growth, emerging markets and international – offer us the opportunity to potentially profit from the changes in market leadership (such as technology to energy or domestic to international).

Leadership shifts will continue to occur; they always have, and I don’t see any reason why they won’t again. It’s up to us as investors to know what’s in our index, and thus put ourselves in the position to take advantage of the opportunity.

Hapanowicz & Associates is an investment and wealth management firm based in downtown Pittsburgh. This is part of a series of occasional columns that Robert Hapanowicz and his daughter, Christina Hapanowicz, submit. Robert is the author of this piece.