Mutual funds and ETFs are dancing to the tune of Apple's stock

What happens when a single stock is influencing the performance of several mutual funds (MFs) and exchange-traded funds (ETFs) alike?

The advantage of portfolio diversification will set to diminish. Perhaps this is what happening with US mutual funds and ETFs as the market heavy weight Apple (AAPL) is influencing the performance of funds.

Apple has the largest market capitalization in the US markets. Market analysts also caution investors that too much exposure to one stock or significant influence of one stock on the portfolio is not advisable.

The latest drop of Apple stock after the earnings report is biting into the mutual funds and ETFs as it is the largest holding in the S&P 500 index. Apple stock has four percent of index holding. Any upward or downward move of Apple's stock will have significant impact on mutual funds (MFs) and exchange traded funds (ETFs).

The 38% growth in Apple's quarterly profits failed to cheer the Wall Street as the slowdown in Apple Watch sales impacted the market sentiment. Soon after the results, the stock fell 6.7% before rebounding and closing the day with 4.2% on 22 July.

It closed at $124.50 on Friday registering a marginal drop of 0.53%. The Apple stock's drop on Wednesday pulled down the Dow Jones Industrial Average by 0.92% and Nasdaq Composite by 1.12%. This shows how the market's performance is highly correlated to Apple's move.

The influence of market heavyweights is reducing the advantage of diversification in the fund portfolios. Apple stock's significant influence on the index, mutual funds and ETFs is a good example of one stock's influence on the market performance.

According to Morningstar Inc's investment research report, Apple has more than 10% holding in 26 funds. Apple is one of the top ten holdings in about 100 stock ETFs. This shows how influential Apple is in directing the performance of mutual funds and ETFs.

If Apple drops five percent, S&P500 would fall 0.2%. Similarly, the mutual funds and ETFs will move accordingly dancing to the tune of Apple. For instance, funds such as iShares US Technology (IYW), SPDR Technology (XLK) have double digit exposure. As a result, Apple's five percent drop could result in one percent fall for IYW.

Apple has largest holding in not only in index composition, but also any mutual fund or ETF. Whether it's S&P 500, Down Jones, Nasdaq or Russell 1000, Apple has significant holding to influence the performance. It's even more when the focus is much on technology.

Just to avoid the market risk of investing in individual stocks, investors prefer to park their funds in mutual funds and ETFs, which means that investors are not getting the advantage of diversification. Then what happens to the yield levels among several funds that are heavily invested in Apple, wonder investors.

Market analysts also warn investors that too much exposure in one stock or significant influence of one stock on the portfolio is not advisable.