A concentrated S&P 500 portfolio with low diversification but strong historical performance

Report created on Feb 25, 2025

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

This portfolio is composed entirely of two S&P 500 ETFs, with a 60% allocation to the SPDR® Portfolio S&P 500 ETF and 40% to the Vanguard S&P 500 ETF. The portfolio lacks diversification, as it is heavily concentrated in large-cap U.S. equities. Compared to a diversified benchmark, this composition is narrow. While such concentration can offer strong exposure to the U.S. market, it may limit the ability to mitigate risks associated with market downturns. To enhance diversification, consider adding different asset classes or regions, which can help balance potential risks and returns more effectively.

Growth Info

The portfolio has demonstrated a strong historical performance, with a Compound Annual Growth Rate (CAGR) of 13.83%. This indicates robust growth over time, outperforming many benchmarks. However, it's important to note the maximum drawdown of -33.90%, which reflects the potential for significant losses during market downturns. While historical performance can provide insights, it doesn't guarantee future results. To potentially reduce drawdowns, consider diversifying across asset classes or including more defensive investments that could provide stability during volatile periods.

Projection Info

The forward projection, based on Monte Carlo simulations, suggests a wide range of potential outcomes. Monte Carlo simulations use historical data to forecast possible future returns, providing insights into risk and return scenarios. The median (50th percentile) projection indicates a 487.9% increase, while the 5th percentile shows a 94.5% increase. Although promising, these projections are not guarantees. Consider the limitations of relying solely on historical data and explore strategies to manage risk, such as diversifying into less correlated assets or regions.

Asset classes Info

  • Stocks
    100%

The portfolio is entirely invested in stocks, with no exposure to other asset classes like bonds or cash. This lack of diversification can lead to increased volatility, as the portfolio is fully exposed to the equity market's ups and downs. Compared to a balanced benchmark, which might include various asset classes, this portfolio is heavily skewed. To achieve better risk-adjusted returns, consider incorporating other asset classes, such as fixed income or real assets, to provide stability and income during market fluctuations.

Sectors Info

  • Technology
    33%
  • Financials
    13%
  • Consumer Discretionary
    11%
  • Health Care
    10%
  • Telecommunications
    10%
  • Industrials
    7%
  • Consumer Staples
    6%
  • Energy
    3%
  • Utilities
    3%
  • Real Estate
    2%
  • Basic Materials
    2%

With a significant allocation to technology (33%) and financial services (13%), the portfolio is concentrated in sectors that can be volatile. While tech stocks have driven recent market gains, they are sensitive to interest rate changes and economic cycles. The sectoral allocation aligns with the S&P 500 but lacks diversity. To mitigate sector-specific risks, consider reallocating some investments toward underrepresented sectors, which could provide a buffer against downturns in dominant areas like technology and finance.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

The portfolio is heavily concentrated in North America, with 99% of its assets allocated there. This geographic concentration limits exposure to international markets, which can offer diversification benefits and potential growth opportunities. Compared to a global benchmark, this allocation is narrow. To enhance geographic diversification, consider investing in international markets, including Europe and Asia, which could provide a hedge against U.S. market downturns and exposure to different economic cycles.

Market capitalization Info

  • Mega-cap
    47%
  • Large-cap
    35%
  • Mid-cap
    18%
  • Small-cap
    1%

The portfolio's market capitalization is primarily in mega and big caps, with 47% in mega caps and 35% in big caps. This concentration in large-cap stocks aligns with the S&P 500's composition but may limit exposure to the growth potential of smaller companies. While large caps offer stability and liquidity, diversifying into mid and small caps could enhance growth opportunities and improve risk-adjusted returns. Consider adjusting the allocation to include a broader range of market capitalizations.

Redundant positions Info

  • Vanguard S&P 500 ETF
    SPDR® Portfolio S&P 500 ETF
    High correlation

The assets in the portfolio, namely the two S&P 500 ETFs, are highly correlated, moving together in response to market changes. This high correlation limits the diversification benefits, as both ETFs essentially track the same index. During market downturns, this can lead to amplified losses. To improve diversification and manage risk, consider incorporating assets with lower correlation to the S&P 500, such as international equities or alternative investments, which could provide a counterbalance during volatile periods.

Risk vs. return

This chart shows the Efficient Frontier, calculated using your current assets with different allocation combinations. It highlights the best balance between risk and return based on historical data. "Efficient" portfolios maximize returns for a given risk or minimize risk for a given return. Portfolios below the curve are less efficient. This is informational and not a recommendation to buy or sell any assets.

Click on the colored dots to explore allocations.

The portfolio's current asset allocation does not align with the Efficient Frontier, which represents the best possible risk-return ratio. The lack of diversification and high correlation between assets limit its optimization potential. To achieve a more efficient portfolio, consider reallocating investments to include a mix of less correlated assets and different asset classes. This could enhance the risk-return profile, providing better potential returns for the level of risk taken. Rebalancing periodically can also help maintain optimal efficiency.

Dividends Info

  • SPDR® Portfolio S&P 500 ETF 1.30%
  • Vanguard S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.26%

The portfolio's dividend yield is modest, with a total yield of 1.26%. Dividends can contribute to total returns, providing income and potentially stabilizing returns during market volatility. While the yield aligns with typical S&P 500 levels, it may not be sufficient for income-focused investors. To increase dividend income, consider adding high-dividend-paying stocks or ETFs, which could enhance cash flow and provide a buffer against market fluctuations, especially for those seeking regular income.

Ongoing product costs Info

  • SPDR® Portfolio S&P 500 ETF 0.02%
  • Vanguard S&P 500 ETF 0.03%
  • Weighted costs total (per year) 0.02%

The portfolio benefits from impressively low costs, with a total expense ratio (TER) of just 0.02%. Low costs are advantageous as they enhance long-term returns by reducing the drag on performance. This cost efficiency is aligned with best practices, allowing more of the portfolio's returns to be retained. Maintaining or even reducing costs further can continue to support better long-term performance. Regularly review expense ratios and consider cost-effective options to maximize net returns.

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