Don’t Buy The 25 S&P 500 Stocks That Have Made The Largest Contribution To The Index’s YTD Return – Higher Ranked Is Not Better

  • Goldman Sachs reported that only 25 stocks accounted for 58% of the index’s 2021 gains, including reinvested dividends, through Dec-9-2021.
  • One can verify the accuracy of this list by ranking the S&P 500 stocks on the factor “Market Capitalization x 1-year Rate-of-Change”, with higher being better.
  • Backtesting to Jan-2000 shows that buying the 25 highest ranked stocks every year at the end of December would have approximately matched the performance of SPY over the backtest period.
  • However, investing similarly in the 25 highest ranked stocks of the lower two terciles of the ranked S&P 500 would have provided over 3-times the total return of SPY.
  • The list of 25 S&P 500 stocks to hold during 2022 is given in Appendix-2, which is expected to provide higher returns to Dec-2022 than the Goldman Sachs list.

(Tercile is a third of a ranked population, the lower two terciles of the ranked S&P500 discards the top third)

The 25-stock Goldman Sachs list of Dec-9-2021 (GS-List) is reproduced in the first table of this article which hi-lights the heavy concentration of money in the largest tech companies, by market capitalization. Also read this relevant commentary by Kim Khan, senior news editor at Seeking Alpha.

A list similar to the GS-List can be created by ranking the S&P 500 stocks on the factor “Market Capitalization x 1-year Rate-of-Change” (the ranked S&P 500) and selecting the 25 highest ranked stocks.

Performance of the Goldman Sachs list from Jan-2021 to Dec-2021

The analysis was performed on the online portfolio simulation platform Portfolio 123 which provides historic financial data for stocks, bonds and ETFs. All backtests in this article are for equal weighted stock holdings and a yearly management fee of 0.2% deducted from the returns.

Figure-1 is a plot of the performance since Jan-2-2021 of the GS-List of 25 stocks that have made the largest contribution to the index’s 2021 return. It shows the survivorship biased 50.3% year-to-date return, versus 25.5% for the benchmark SPY.

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2021 Performance of the 25 stocks that made the largest contribution to the index’s 2020 return

 The GS-List would have been different at the end 2020 as it would have contained the 25 highest ranked stocks of the ranked S&P 500 at the end of December 2020. The 2021 return of this list is not survivorship biased; 29.0% year-to-date, versus 25.5% for the benchmark SPY, as shown in Figure-2.

The listing is in Appendix-1 and contains 13 stocks of the GS-List of 12/9/2021 which accounted for 45% of the S&P 500’s YTD 2021 return, and included all the five stocks which accounted for most of the return, MSFT, GOOGL, AAPL, NVDA, and TSLA.

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Performance from Jan-1999 to Dec-2021 of the 25 stocks that made the largest contribution to the index’s preceding year annual return

Figure-3 shows the simulated performance from 1/2/1999 to 12/23/2021 for a strategy that annually buys the 25 stocks that have made the largest contribution to the S&P 500 preceding one year return (on the first trading day of the fourth week of December) and simultaneously sells the stocks which are no longer in the top 25.  Similar to the one year performance, this strategy would only have matched the performance of SPY over the last 23 years.

This is not a good investment strategy; the maximum drawdown would have been -65% and it would have been better to just hold SPY over this period.

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Performance from Jan-1999 to Dec-2021 of the 25 highest ranked stocks of the lower two terciles of the ranked S&P 500

Better returns are obtained by annually investing in the 25 highest ranked stocks of the lower two terciles of the ranked S&P 500, as shown in Figure-4. This would have, with trading only at the end of each year, provided a total return 3.4-times higher than that of SPY, or an annualized return of 13.2%, versus 7.9% for SPY.

This should be a much better investment strategy than buy-and-hold SPY.

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The current holdings as of 12/27/2021 are the 25 stocks the model will hold until the first trading day of the fourth week of December 2022. The listing is in Appendix-2, the iMarketSignals list for 2022, and the sector allocation is in the diagram below.

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Conclusion

From the analysis it would appear that investing annually in the 25 highest ranked stocks of the lower two terciles of the ranked S&P 500 will produce far better returns than periodically investing in the group that has made the largest contribution to the twelve month return of the S&P 500.

Appendix-1:

The 25 stocks of the S&P 500 that have made the largest contribution to the index’s one year return to Jan-2-2021.

The 25 highest MktCap*ROC-ranked stocks of the S&P 500

Generated on 1/2/2021.

Ticker Name Rank Pct
YTD
also in
GS-List of Dec-9-2021
TSLA Tesla Inc 99.8 38.24 TSLA
AAPL Apple Inc 99.6 36.56 AAPL
AMZN Amazon.com Inc 99.4 7.35 AMZN
MSFT Microsoft Corp 99.2 54.34 MSFT
NVDA NVIDIA Corporation 99.0 124.39 NVDA
GOOGL Alphabet Inc 98.8 69.65 GOOGL
PYPL PayPal Holdings Inc 98.6 -17.35
FB Meta Platforms Inc 98.4 22.87 FB
NFLX Netflix Inc 98.2 17.48
QCOM QUALCOMM Inc. 98.0 24.42
TMUS T-Mobile US Inc 97.8 -8.96
ADBE Adobe Inc 97.6 16.2 ADBE
AMD Advanced Micro Devices Inc 97.4 55.88
NOW ServiceNow Inc 97.2 22.23
WMT Walmart Inc 97.0 -3.08
NKE Nike Inc 96.8 18.98
TMO Thermo Fisher Scientific Inc 96.6 38.4 TMO
AVGO Broadcom Inc 96.4 58.66 AVGO
DIS Walt Disney Co (The) 96.2 -14.52
UNH Unitedhealth Group Inc 96.0 43.37 UNH
UPS United Parcel Service Inc 95.8 29.99
V Visa Inc 95.6 0.71
DHR Danaher Corp 95.4 43.56 DHR
HD Home Depot Inc. (The) 95.2 53.04 HD
CRM salesforce.com Inc 95.0 14.75

Appendix-2: iMarketSignals List for 2022

The 25 highest ranked stocks of the lower two terciles of the ranked S&P 500 index as of 12/27/2021

Ticker Name Rank Market
Cap $-B
Sector
AFL AFLAC Inc 62.5 38.2 Finance
ALB Albemarle Corp 63.5 26.7 Non-Energy Materials
BKNG Booking Holdings Inc 63.3 98.6 Consumer Services
BSX Boston Scientific Corp 63.9 60.9 Healthcare
CDW CDW Corp 66.5 27.6 Technology
CF CF Industries Holdings Inc 65.7 15.5 Non-Energy Materials
DLR Digital Realty Trust Inc 62.3 48.2 Finance
DRE Duke Realty Corp 65.3 23.8 Finance
EQIX Equinix Inc 62.1 73.7 Finance
ITW Illinois Tool Works Inc. 66.9 75.5 Industrials
LEN Lennar Corp 64.5 34.7 Consumer Cyclicals
LH Laboratory Corp of America Holdings 62.9 28.9 Healthcare
MAR Marriott International Inc 64.7 53.8 Consumer Services
MCHP Microchip Technology Inc 63.1 48.2 Technology
MCK McKesson Corp 66.1 36.8 Healthcare
MDLZ Mondelez International Inc 63.7 90.6 Consumer Non-Cyclicals
OKE ONEOK Inc 65.9 25.9 Energy
ROK Rockwell Automation Inc. 65.1 39.5 Industrials
SBAC SBA Communications Corp 65.5 41.0 Finance
SBUX Starbucks Corp 66.3 132.6 Consumer Services
SLB Schlumberger Ltd 64.9 41.5 Energy
SYK Stryker Corp 64.1 101.2 Healthcare
TSCO Tractor Supply Co 64.3 26.0 Consumer Cyclicals
WBA Walgreens Boots Alliance Inc 62.7 43.7 Consumer Non-Cyclicals
WELL Welltower Inc 61.9 36.0 Finance

 

 

 

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5 comments on “Don’t Buy The 25 S&P 500 Stocks That Have Made The Largest Contribution To The Index’s YTD Return – Higher Ranked Is Not Better
  1. Solid says:

    Hi Georg,
    thanks for this model. Interesting concept, counterintuitive.

    Can you provide numbers for NASDAQ oder NASDAQ 100 ?
    Thanks.

    • geovrba says:

      For NASDAQ 100 = (ETF QQQ)

      From 1999 to 2022 QQQ annualized return was 10.23% with a max D/D= -83%.

      The top ranked 15 positions closely matched index return 9.43% with a max D/D= -84%.

      When confining universe to the lower 2 terciles then the top ranked 15 positions’ annualized return would have been 14.33% with a max D/D= -83%.

  2. dp55 says:

    Are the annual returns of the top 25 versus S&P available?

    • geovrba says:

      Calendar year (%)returns for model.
      Year … Model … SPY
      1999 … 2.73 … 20.39
      2000 … 34.89 … -9.74
      2001 … -1.33 … -11.76
      2002 … -8.51 … -21.58
      2003 … 38.11 … 28.18
      2004 … 19.5 … 10.7
      2005 … 10.79 … 4.83
      2006 … 20.96 … 15.85
      2007 … 5.25 … 5.15
      2008 … -32.33 … -36.79
      2009 … 67.8 … 26.35
      2010 … 18.9 … 15.06
      2011 … 4.1 … 1.89
      2012 … 17.69 … 15.99
      2013 … 34.73 … 32.31
      2014 … 10.28 … 13.46
      2015 … -0.99 … 1.23
      2016 … 11.23 … 12
      2017 … 24.69 … 21.71
      2018 … -6.5 … -4.57
      2019 … 28.84 … 31.22
      2020 … 21.52 … 18.33
      2021 … 28.83 … 28.73

  3. ocpaddler says:

    Could you run this for the midcaps – MDY?

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