Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

Investing in an index fund is one of the best investment moves you can make. Index funds have

low fees, they're tax efficient, they tend to generate good returns over time, and most

importantly they provide diversification, or at least they're supposed to.

Historically indexed funds have outperformed actively managed funds, and this is mostly due

to their lower fees. Many of the big stock indices like the S&P 500 and the NASDAQ are not nearly as diversified

as they used to be, and this is a growing problem.

There are two main uses for a stock market index, benchmarking and investment.

Initially stock market indices existed to inform investors of how

well the overall stock market was doing and this was their main purpose for a very long time.

Stock market indices were already 87 years old in 1971 when BGI launched the first index fund, followed by Vanguard a few years

later in 1975. Index funds, which were at first ridiculed and called un-American for setting

mediocrity as a goal, now control 20 to 30% of the American equities market, if not more.

The function of a stock index today is more to provide a list of stocks for index funds to

invest in than to inform investors of how the overall market is doing.

The S&P 500, the index that most investors pay attention to, is off to a great start this year.

It's up around 19% year to date and while that's great, the returns of the index have mostly

been driven by seven of the largest US tech companies, Apple, Microsoft,

Alphabet, Amazon, Invidia, Tesla and Mada. You know, Facebook. These stocks are up between

35% and 210% year to date. The remaining 496 companies are in aggregate about flat. Technology companies

make up 28.1% of the S&P 500. And for those who consider Tesla a technology company rather

than an automaker as S&P classify it, technology is then 29.9% of the overall index by weight.

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