How to Overcome Our Highly Concentrated Markets

Why It Matters

Concentration risk threatens the core promise of passive investing—broad, low‑cost market exposure—by tying returns to a few oversized companies. Equal‑weight ETFs provide a practical tool for investors to diversify without abandoning the passive approach.

Key Takeaways

• ASX 200 top ten firms hold ~50% market value.
• S&P 500 top ten firms represent ~42% of market cap.
• Equal‑weight ETFs spread exposure, reducing sector concentration.
• Van Eck MVW and Betashares QUS provide equal‑weight options.
• Blend traditional and equal‑weight ETFs to lower risk, boost returns.

Pulse Analysis

The surge in market concentration has reshaped the risk profile of two of the world’s most followed equity indices. In Australia, miners and banks now dominate the ASX 200, with seven of the ten largest constituents accounting for almost half of the index’s value. Across the Pacific, the U.S. S&P 500 mirrors this trend as big‑tech giants collectively hold about 42% of total market capitalization, a historic peak that can amplify sector‑specific volatility and erode the diversification benefits that passive investors traditionally rely on.

Equal‑weight exchange‑traded funds (ETFs) address this imbalance by assigning identical dollar allocations to each component stock, irrespective of market cap. This methodology flattens sector exposure, giving smaller firms a proportionally larger voice in the portfolio. Products like Van Eck’s ASX Equal Weight ETF (MVW) and Betashares’ S&P 500 Equal Weight ETF (QUS) have demonstrated the potential for outperformance relative to their cap‑weighted counterparts, though past results are no guarantee of future gains. By reducing the dominance of a few mega‑cap names, these funds can also lower the correlation between the portfolio and the performance swings of any single sector.

For the disciplined passive investor, a hybrid allocation strategy can capture the best of both worlds. Maintaining the bulk of exposure in low‑cost, cap‑weighted index funds preserves the core equity‑premium return, while allocating a modest slice—say 5‑10%—to equal‑weight ETFs adds diversification and a hedge against concentration risk. Regular rebalancing ensures the blend stays aligned with long‑term objectives, allowing investors to stay simple, cost‑effective, and better insulated from the pitfalls of an increasingly top‑heavy market landscape.