By Aude Martin , Andrzej Pioch 

How can investors look to mitigate rising company-specific risks in widely followed equity indices?

Global equity benchmark holders have enjoyed a market rally after a difficult 2022, at least until this summer. Between mid-October 2022 and the end of July 2023, a typical US equity index delivered a return comfortably above 25%.¹

Behind the strong headline number, however, lies an increasing performance contribution from a comparatively small number of companies. This poses concentration risk not only for investors who hold US index exposure, but also for holders of global equity indices with common underlying exposure.

A typical broad global equity benchmark has around two-thirds of its stocks domiciled in the US.² Perhaps unsurprisingly, global equity indices therefore share the majority of their top 10 constituents with US equity indices, and the typical overall portfolio overlap between the two is currently over 60%.³

Given the prominence of these mainstay indices in investors’ portfolios, it is interesting to analyse how they have evolved over time. In this blog, we will also touch on how investors might look to diversify,⁴ to potentially mitigate rising concentration risks.

Read more

¹. The S&P 500, for instance, rose 28.3% over this period. Source: Bloomberg data covering 12 October 2022 to 31/07/2023

². The MSCI World, for instance, has a 69.7% allocation to US stocks. Source: https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb

3. Nine of the top 10 portfolio holdings are the same in the S&P 500 and the MSCI World, and the overall portfolio overlap is around 66%. Source: Bloomberg data using ETFs as a proxy of index compositions, as of 02 October 2023

⁴. It should be noted that diversification is no guarantee against a loss in a declining market.