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Looking at the assets under management tallies at some global equity exchange traded funds and index funds, it’s safe to say advisors are among the market participants that have tapped these products as avenues for bringing some geographic exposure to client portfolios.
A brief refresher: regardless of asset class, funds with “global” in their titles typically feature exposure to U.S. assets, stocks, bonds, etc. Conversely, international funds do not hold domestic assets. At least they shouldn’t. Point is global funds, at least in theory, should bring a little bit of diversification to portfolios.
Take the case of the $19.4 billion iShares MSCI ACWI ETF (ACWI). That ETF holds 2,321 stocks from nine different countries. Sounds diverse, right? Not really. Nine of the fund’s top 10 holdings are domestic stocks and the U.S. accounts for nearly two-thirds of the portfolio’s geographic exposure. Point is oft-discussed concentration risk is not an issue confined to U.S. borders.
Global Concentration Risk Is Real
The lack of diversification found in some plain vanilla global equity funds could be seen as a disappointment to some advisors, particularly at a time when the top five holdings in the S&P 500 combine for almost 27% of that gauge’s weight.
In a recent report, Chris Sutton, Investment Manager at the Edinburgh and London-based investment firm Aubrey Capital Management, explored the concept of the U.S. looming too large on the global equity and bond states – something that’s gained prominence since markets bottom in the wake of the global financial crisis.
“In share markets, those 16 years have also seen an expansion of the domination of the US market, to the extent that it now comprises almost 65% of the total value of global share markets. Europe and Japan have seen their combined share fall from 39% to 20%, within which the UK is now just 4% of global stock market value,” notes Sutton.
Consider the aforementioned ACWI. Japan, which has been one of the better-performing stock markets in the world over the past several years, is that fund’s second-largest country weight, but to the tune of just 4.70%. The weight assigned to U.S. stocks in the ETF is more than 14x what goes to Japan.
Some of the concentration in global equity funds is attributable to Chinese stocks languishing over the past few years with India ranking as the best-performing large emerging market during that span. Yet despite the bullishness displayed by Indian stocks, they remain a scant percentage of global equity funds.
“Within the developing world, China’s star has collapsed in recent years, replaced by the rise of India, which has recently overtaken the UK both in the size of its economy, and the size of its stock market,” adds Sutton.
Concentration Risk Still an Issue in the U.S.
As noted above, concentration risk isn’t limited to the U.S., but it remains quite prominent in basic equity benchmarks here – the result of the seemingly undaunted rise of the communication services and technology sectors’ market values.
One of the concerns about concentration issues in U.S. stocks is that a smaller number of names are contributing significant percentages of upside for supposedly broad indexes.
“Over the first six months of 2024, the US stock market produced 75% of total global stock market return. Within that, NVIDIA, was responsible for 59% of the US stock market return, and therefore 50% of total global market return,” observes Sutton.
Fighting these scenarios is difficult and perhaps unadvisable, but advisors can consider adding equal-weight funds to the mix to bring some diversification to domestic and global exposures.