How to reduce concentration risk in global tracker?

[mrwolf]

I am (and continue to be) a big fan of passive global trackers such as VEVE, both for the bulk of my ISA and SIPP. I'm however starting to get quite antsy about the concentration in US tech stocks (over 20% of the total in Apple/MS/Google/FB/Nvidia/Amazon). The reason I was comfortable with a global tracker was precisely that it was more diversified, but it is now becoming what I was trying to avoid. Obviously this has been a result of exceptional run in these stocks, so maybe I shouldn't complain too much, but I'd be more than happy to trade future upside for less concentration.

Assuming that I am not alone in these concerns, so, for those who are doing anything about it... what are you doing about it?

As for me, I am doing the obvious, and buying less risky things to compensate/balance (short dated gilts have been good lately). But ideally I'd like to find that balance through other low cost, global passive solutions that would exclude US tech, or cap it. The easier choice of going with a selection of small/mid cap global trackers as well as trackers/ITs by sector or geography, seem to end up being quite costly (compared with the 0.1-0.2% I'm used to...)

[JohnW]

'Despite the presence of those giants, which dominated stock market capitalization even more than they did profitability—in the late 1950s, three stocks accounted for almost 30% of the S&P’s value—that era is not remembered for its stock market volatility. Which leads to the question: Are narrow marketplaces riskier? '
He gives an answer this week: https://www.morningstar.com/columns/rek ... ncentrated

[kempiejon]

I am (and continue to be) a big fan of passive global trackers such as VEVE, both for the bulk of my ISA and SIPP. I'm however starting to get quite antsy about the concentration in US tech stocks (over 20% of the total in Apple/MS/Google/FB/Nvidia/Amazon). The reason I was comfortable with a global tracker was precisely that it was more diversified, but it is now becoming what I was trying to avoid. Obviously this has been a result of exceptional run in these stocks, so maybe I shouldn't complain too much, but I'd be more than happy to trade future upside for less concentration.

Assuming that I am not alone in these concerns, so, for those who are doing anything about it... what are you doing about it?

As for me, I am doing the obvious, and buying less risky things to compensate/balance (short dated gilts have been good lately). But ideally I'd like to find that balance through other low cost, global passive solutions that would exclude US tech, or cap it. The easier choice of going with a selection of small/mid cap global trackers as well as trackers/ITs by sector or geography, seem to end up being quite costly (compared with the 0.1-0.2% I'm used to...)

Hello mrwolf,
I like vanguard ETFs for global coverage in my SIPP. Rather than the global VWRL or Developed VEVE I buy region specific for USA, Europe exUK, Japan, Asia ex Japan, Emerging markets, etc. That allows me to over/under weight regions like the USA in your example. You could add non USA ETFS to your VEVE holding to adjust. It doesn't preclude the Magnificent Seven but the whole continent.

Another way of looking at it - the weighting in US stocks is precisely because they are growing in capital and you are capturing that growth.

[Spet0789]

I am (and continue to be) a big fan of passive global trackers such as VEVE, both for the bulk of my ISA and SIPP. I'm however starting to get quite antsy about the concentration in US tech stocks (over 20% of the total in Apple/MS/Google/FB/Nvidia/Amazon). The reason I was comfortable with a global tracker was precisely that it was more diversified, but it is now becoming what I was trying to avoid. Obviously this has been a result of exceptional run in these stocks, so maybe I shouldn't complain too much, but I'd be more than happy to trade future upside for less concentration.

Assuming that I am not alone in these concerns, so, for those who are doing anything about it... what are you doing about it?

As for me, I am doing the obvious, and buying less risky things to compensate/balance (short dated gilts have been good lately). But ideally I'd like to find that balance through other low cost, global passive solutions that would exclude US tech, or cap it. The easier choice of going with a selection of small/mid cap global trackers as well as trackers/ITs by sector or geography, seem to end up being quite costly (compared with the 0.1-0.2% I'm used to...)

Hello mrwolf,
I like vanguard ETFs for global coverage in my SIPP. Rather than the global VWRL or Developed VEVE I buy region specific for USA, Europe exUK, Japan, Asia ex Japan, Emerging markets, etc. That allows me to over/under weight regions like the USA in your example. You could add non USA ETFS to your VEVE holding to adjust. It doesn't preclude the Magnificent Seven but the whole continent.

Another way of looking at it - the weighting in US stocks is precisely because they are growing in capital and you are capturing that growth.

A cheaper and somewhat easier route is to hold say 70% in a global tracker and 30% in the basket of regionals. Then you can deviate from the global index weightings by up to 30% of the weight (which is a lot) by adjusting the basket.

[swill453]

Another way of looking at it - the weighting in US stocks is precisely because they are growing have grown in capital

Fixed that for you

Scott.

[kempiejon]

Fixed that for you

indeed.

A cheaper and somewhat easier route is to hold say 70% in a global tracker and 30% in the basket of regionals. Then you can deviate from the global index weightings by up to 30% of the weight (which is a lot) by adjusting the basket.

Definitely easier but it worked out cheaper my way at the time that was a part of the motivation.

[Lootman]

I am (and continue to be) a big fan of passive global trackers such as VEVE, both for the bulk of my ISA and SIPP. I'm however starting to get quite antsy about the concentration in US tech stocks (over 20% of the total in Apple/MS/Google/FB/Nvidia/Amazon).

If those companies are generating more than 20% of the earnings and earnings growth of the S&P 500, and I believe that they are, then one could argue that such trackers are actually under-weight those companies.

It is interesting to watch how they jump about though. Nvidia is on a tear these last 18 months. Apple and MicroSoft have stalled. Tesla and Netflix dropped out of the favoured titans. FB/Meta, Google/Alphabet and Amazon have done nicely. And the acronyms have changed too from FANG to MAGA to the Magnificent Seven currently.

A few other US companies are nudging a trillion in market cap such as Eli Lilly (now the must-own global healthcare stock) and of course the perennial Berkshire Hathaway. Broadcom is getting up there as well.

I think this is all healthy and so best to own all of them, in my opinion. But if 65% in North America alarms you then buy the individual regional ETFs and weight them appropriately.

[mrwolf]

I am (and continue to be) a big fan of passive global trackers such as VEVE, both for the bulk of my ISA and SIPP. I'm however starting to get quite antsy about the concentration in US tech stocks (over 20% of the total in Apple/MS/Google/FB/Nvidia/Amazon).

If those companies are generating more than 20% of the earnings and earnings growth of the S&P 500, and I believe that they are, then one could argue that such trackers are actually under-weight those companies.

It is interesting to watch how they jump about though. Nvidia is on a tear these last 18 months. Apple and MicroSoft have stalled. Tesla and Netflix dropped out of the favoured titans. FB/Meta, Google/Alphabet and Amazon have done nicely. And the acronyms have changed too from FANG to MAGA to the Magnificent Seven currently.

A few other US companies are nudging a trillion in market cap such as Eli Lilly (now the must-own global healthcare stock) and of course the perennial Berkshire Hathaway. Broadcom is getting up there as well.

I think this is all healthy and so best to own all of them, in my opinion. But if 65% in North America alarms you then buy the individual regional ETFs and weight them appropriately.

Yes, sure, I don't disagree with any of that. I do think it's a fair reflection of their current profitability and growth expectations. But it is a large % of one's portfolio (I have most of my equity portfolio in global passive trackers, with only small "fun" allocations elsewhere) to hold in such a concentrated growth-oriented sector, where even a small correction to growth expectations of these cloud/AI companies can give any portfolio a good scare.

I'm fairly ok with the 65% weight in North America, just wished that it was more spread across other sectors/companies. Exposure to the USD is nice too.

As you say, the most logical option is to switch 10-20% of my global funds to other regional options. Ideally my favourite and lowest effort would be something like VEU (Vanguard FTSE All-World ex-US ETF), which promises ex-US (40% Europe, 25% emerging, 25% pacific) and isn't very top-heavy, for a mere 0.07% cost. But doesn't seem to be available through any of my UK-based brokers, so will have to build something equivalent by hand.

[GeoffF100]

As JohnW's Morningstar link shows the current concentration of earnings and market cap is not unusual, and it has been more extreme. It is not much to worry about. Today's winners will eventually slide down the table, but you own their replacements too with a global tracker. I have diluted the US a little with some UK bias, and I have a full weight of emerging markets, but that is as far as I am willing to go.

[LondonChris]

You should be conscious that you more you decide to allocate to other regions, the more you are unconsciously becoming an active investor (despite via passive products). There has been a view for probably the last 8 years or so that the US looks expensive. 8 years ago you could have thought I will underweight the US and overweight other geographies - clearly that would not have been a great call. You should also be aware that other geographies have their own concentration "issues" - eg Dev Europe ex UK has 18.7% exposure to Europe's top 7 (Novo, ASML, Nestle, LVMH, Novartis, SAP, Roche). OK - it's less techy than the US but it is still relative concentration. And of course our own UK is crazily concentrated - 33.5% weighting just in 5 stocks.

[Lootman]

You should be conscious that you more you decide to allocate to other regions, the more you are unconsciously becoming an active investor (despite via passive products). There has been a view for probably the last 8 years or so that the US looks expensive. 8 years ago you could have thought I will underweight the US and overweight other geographies - clearly that would not have been a great call.

You should also be aware that other geographies have their own concentration "issues" - eg Dev Europe ex UK has 18.7% exposure to Europe's top 7 (Novo, ASML, Nestle, LVMH, Novartis, SAP, Roche). OK - it's less techy than the US but it is still relative concentration. And of course our own UK is crazily concentrated - 33.5% weighting just in 5 stocks.

Indeed, and 3 of those 7 top European shares are Swiss.

I recall back when Nokia was a success that at one point it represented 50% of the market cap of the Finnish stock market.

By contrast the US is a very broadly diversified market. Despite having a number of $2 and $3 trillion market cap companies, no one US share is more than 7% of the S&P 500 index. Nor more than 6% of the entire US stock market.

[vand]

If I were to do it I would buy a global tracker, but then also have separate trackers for developed ex-US and emerging markets. 70% in the global tracker, 20% in the ex-US one, and 10% in EMs, so your overall US allocation is the 65% or whatever the US weighting is x 0.7, ie 46%ish.

[kempiejon]

Well there's a thing, the marketing department must have had the idea that customers would buy such a beast as an Ex US global ETF

DWS has launched Europe’s first MSCI World ex-US ETF as investors increasingly look to separate their US equity allocations.

The Xtrackers MSCI World ex USA UCITS ETF (EXUS) is listed on the Deutsche Boerse with a total expense ratio (TER) of 0.15%. The ETF will list on the London Stock Exchange on Friday.

EXUS physically replicates the MSCI World ex USA index to capture large and mid-cap companies from 22 global developed markets, excluding the US.

The index is comprised of 870 constituents, covering approximately 85% of the free float-adjusted market capitalisation in each country.

Japan is the index’s highest country exposure, at 21.2%, followed by the UK at 12.9% and France at 10.8%.

The launch follows the boom of ‘magnificent seven’ stocks, particularly Nvidia, which has led to an increasingly higher weighting in the MSCI World index.

As a result, the US currently accounts for 70% of the weighting in the index.

Xtrackers MSCI World ex USA UCITS ETF 1C
ISIN IE0006WW1TQ4 | Ticker EXUS

https://www.etfstream.com/articles/dws- ... -ex-us-etf