Nobody Likes Market Corrections

No Investment Goes Up All the Time, But Good Ones Will Almost Surely Go Up Over Time

After a year like 2021, when virtually every major stock market index gained more than 20%, it’s easy to forget that equities occasionally go down – by a considerable amount sometimes. In fact, short-term corrections are a normal part of the market cycle, and the timing of their occurrences (contrary to what the pundits might tell you) is virtually unknowable. The recent uptick in volatility has reminded investors of that reality.

But there’s another reality to consider in periods of extreme volatility: all equity benchmarks are likely to go down, and some – especially high-performers like the Nasdaq-100® – will go down even more. Why? Not because of the quality of the companies represented in the index…the Nasdaq-100 includes some of the world’s biggest companies, iconic names like PepsiCo, Costco Wholesale, and PayPal Holdings.

So, what, then, is the cause?

Concentration Matters

In practice, all market-cap weighted indices are, or will be, highly concentrated in relatively few securities. The Nasdaq-100 by definition represents 100 stocks, but just three names — Apple, Amazon, and Microsoft — make up a third of the index’s value.

Even more striking, when combined with the next three names – Meta (formerly Facebook), Alphabet, and Tesla – these outsized positions represent nearly half of the index’s value. In other words, a Nasdaq-100 investor has almost as much money allocated to those six companies as the rest of the index components combined.

All market-cap weighted indices face the same challenge, even the S&P 500, which is arguably the de facto barometer of the overall stock market’s performance. Those three stocks (Apple, Amazon, and Microsoft) make up about one-sixth of the total weight of the 500-stock index.

Concentration in fast-growing stocks is the result of the methodology. And that’s not necessarily a bad thing.

Performance Matters

While the outsized allocations helped propel the Nasdaq-100 to a new high in mid-November of 2021, so far this year — an unusually heightened period of volatility and general stock weakness — the index is down 22.54% (as of 5/31/22). The S&P 500, meanwhile – also coming off its all-time high around the same time — is down just 12.76% (as of 5/31/22). The Nasdaq-100’s recent underperformance is notable to be sure. But the negative number over the last few months pales in comparison to the index’s outperformance dating back to 2012.

Driven by the same kind of concentration in leading stocks and sectors, the Nasdaq-100 Index has generated an annualized return of just over 18% over the last 10 years.*

That’s over four percentage points higher than the S&P 500 for the same period.

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Source: Bloomberg

Preparation Matters

While well-advised investors are surely sticking their long-term investment plans, some are also considering strategies that can minimize drawdowns during this tough stretch, like dollar-cost averaging- or purchasing a fixed amount at a regular interval regardless of the asset’s price. Dollar-cost averaging into a mutual fund like Shelton the Nasdaq-100 Index Fund (Ticker: NASDX) during this downturn, for example, is literally buying equities on sale.

With a 20-year track record of tracking the index, NASDX has earned an Overall Morningstar Rating of 5 stars among 1,142 Large Growth funds, based on risk-adjusted returns, as of 5/31/2022. With roughly $1 billion in assets, NASDX has a demonstrable record of participating in the market’s inevitable turnarounds.

Growth of $10k

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Source: Morningstar Direct

Total returns include changes in share price and the reinvestment of income dividends and all capital gains distributions. All performance figures reflect an expense reimbursement, where applicable. Without the expense reimbursement, the performance figures would be lower. Performance figures represent past performance and are not a guarantee of future results. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance data quoted. For more current month-end Fund performance information, please call our office at (800) 955-9988.

The Investment objective of an index fund is to replicate the performance of the underlying index and the components of the index are determined by the index provider and not Shelton Capital Management.

Bottom Line:

Investing in companies making an impact towards the economy of the future can be a good idea. Buying them when they’re on sale can be a great idea. It’s true that the markets are unknowable in the short run, but history shows us the market has recovered from its past crises.

Important Information

Fund information is not intended to represent future portfolio composition. Portfolio holdings are subject to change and should not be considered a recommendation to buy individual securities. The Fund invests in the largest non-financial companies that are traded on the Nasdaq Stock Market. They are currently concentrated in the technology sector which has been among the most volatile sectors of the U.S. stock market. During a declining stock market, this Fund will lose money. It would potentially lose more money than other large cap stocks.

Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, visit www.sheltonfunds.com or call (800) 955-9988. A prospectus should be read carefully before investing.

INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.

© 2022 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management.

The S&P 500® Index is a market-capitalization-weighted index that measures that measures the performance of the common stocks of 500 leading U.S. companies.