The increasing dominance of just a handful of tech stocks in the major market indexes has led to concern about passive funds becoming too concentrated. It turns out that many active funds carry the same potential risk.
Bank of America equity and quant strategist Savita Subramanian said in a note to clients that active managers are also betting big on just a handful of winners.
"Funds’ concentration risks have grown alongside the benchmarks’ – the average large cap fund holds 33% of their portfolio in their largest five holdings, up from just 26% in Dec. 2022. Similarly, 25% of funds have >40% of their portfolio in their top five holdings today vs. <5% of funds in Dec. 2022," the note said.
Nvidia has been the main driver of increased market concentration, gaining more than 200% over the past year. Many see even more upside for the stock, with Citi reiterating a buy rating on Nvidia and hiking its price target on Wednesday.
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But it isn't just Nvidia that is seeing widespread buying, according to Bank of America.
"Momentum is now the most crowded factor group, where funds have shifted from a record-low 14% underweight in 2022 to nearly 30% overweight today," the note said, while exposure to utilities stocks is at a 14-year high. |
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Data as of Wednesday, June 26 at 9:00 a.m. ET
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The electric vehicle stock surged premarket after Volkswagen agreed to invest up to $5 billion as part of a potential joint venture. Shares of Rivian were down nearly 50% for the year before the announcement. |
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The delivery company reported better-than-expected results for its fiscal fourth quarter. FedEx expects revenue to return to growth in its next fiscal year after falling in its 2024 fiscal year. |
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