The second-quarter results season for the US technology giants was generally viewed as being positive for the markets with the Nasdaq and the S&P 500 receiving boosts after Alphabet, Apple, Facebook and others set a positive tone for the second half of the year.
Yet the dominance of what have come to be called the FAANGs - Facebook, Apple, Amazon, Netflix and Google (Alphabet) - is causing some concern in commentator circles, particularly when it comes to passive investment and investor expectations of what tech ETFs are designed to deliver.
The statistics are revealing. In the S&P 500, Facebook, Apple, Amazon and Microsoft make up over 10% of the index by weighting while the tech sector as a whole - which doesn't include Amazon -is worth approximately 20% of the index.
Drill down to the tech indices and the concentration becomes even more obvious. In the S&P US Technology Index, as of mid-August this year, Apple has a weighting of nearly 15% - fitting for a company that is predicted by analysts to be on its way to becoming a trillion-dollar company in the next few years - while Alphabet is worth just under 11%, Microsoft is worth 10.5% and Facebook is worth 7%.
In the MSCI World Technology index, meanwhile, the dominance continues with Apple given a 13% weighting, Alphabet over 10.5%, Microsoft nearly 9% and Facebook over 6%.
Rebecca Chesworth, senior equity strategist at SPDR ETFs, makes the point that tech stocks are "fundamental" to the performance of US and global stock markets having notched up capital and income returns over the past 10 years of 189% compared with a "still decent" 11% return from the S&P 500 over the same period.
More problematically, though, Chesworth points out that what the headline figures obscure from view is a more volatile underlying performance with tech stocks showing a higher standard deviation of returns on average, falling more when investors are nervous and rising faster when confidence returns.
The bigger the better
As is obvious from the names of the companies, the over-concentration happens for a reason. "If you believe that the market is efficient, then it is impossible to say these companies are mispriced," says Monika Dutt, passive strategies research analyst at Morningstar Europe.
These US tech behemoths are at the forefront of what used to be called the new economy but as Chesworth says, previous definitions of what constitutes tech are increasingly irrelevant as investors buy into what is more precisely a barometer of consumer confidence.
"The sector nowadays is made up of companies which are defined by their use of technology as a platform to deliver their goods or services, and not necessarily the actual product itself," she says.
"For example, Facebook and Google-owner Alphabet share a reliance on technology and the internet as a delivery mechanism, but are more reliant on consumer confidence and advertising revenues."
This point is illustrated by the fact that both Amazon and Netflix currently sit in the consumer discretionary sector, not tech, where they are again at the forefront of similar sector dominance. "Along with Priceline, Expedia and Trip Advisor, the internet retail sub-industry grouping now accounts for 22% of the sector and its faster growth is distorting sector trends," says Chesworth.
Although arguably it has more impact on active managers for whom the preponderance of big names makes outperformance an even more difficult task, these concentrations do have an impact in the passive space,
For ETFs, the relevant UCITS 5/10/40 rule stipulates that investments of more than 5% with a single issuer may not make up more than 40% of the whole portfolio. For instance, SPDR's S&P US Technology Select Sector UCITS ETF shows the top holdings (with weights about 5%) constitute 43% of the fund and thus would fall foul of the UCITS rule.
To get around this, the fund contains provisions within its prospectus that say that under UCITS regulations, a fund is allowed to hold up to 35% of the fund in individual constituents "due to exceptional market conditions."
However, Dutt says of over-concentration generally that it does raise issues. Indeed, in looking at the iShares Nasdaq 100 ETF, she suggests that the heavy concentration at stock and sector levels, the fund "doesn't represent a compelling long-term investment proposition."
"It depends on how much of your general portfolio is invested in some of these companies," she adds. "If something hits the tech sector, it could wipe out your portfolio. People could be doubly exposed."
There are, however, options available for those that wish to ensure exposure to true tech innovation.
Dutt points to the iShares Automatic and Robots ETF and iShares Digitalisation where she says it is "interesting to note" the smaller-cap tilt of the constituent companies.
In the first, no company constitutes more than 2 percent of the index and the average market cap is $4.4bn while in the latter example no company makes up more than 1.5% of the total and the average market cap is $5.3bn. In both indices, medium-sized enterprises make up nearly 50% of the portfolio and giant companies make up between 8-10%.
"These are much more diversified," Dutt says. "These are examples of indexes which follow mega-trends."
Back to the old world
Europe is another destination for investors seeking tech exposure away from the US heavyweights, but they will need to be aware that similar concentrations are in evidence, at least as far as the Stoxx Europe 600 Technology index where Germany's SAP plays the role of the behemoth with a 27%-plus weighting while Dutch semiconductor manufacturer ASML represents a further 15%.
Indeed, the top 10 holdings of the iShares Stoxx Europe 600 Technology ETF represent near enough 75% of the total holdings.
Chesworth, however, believes that given the cyclical nature of technology demand "the dynamics for the European sector are more attractive than the US equivalent because of their relative positions in the economic cycle."
She adds: "Another key point of difference is that institutional investors are underweight in European IT stocks against being very overweight in US IT stocks; this means there is more scope for new buyers into the sector."