ASX 200 shares are finishing the week strongly as the S&P/ASX 200 Index (INDEXASX: XJO) surged past the 7,000 point benchmark yesterday.
The record-breaking day was helped largely due to gains from some of the biggest companies in Australia. This included the likes of Commonwealth Bank of Australia (ASX: CBA) hitting a new 52-week high while CSL Limited (ASX: CSL) shares climbed beyond $300 to a new record high.
So, despite the strong gains from the ASX in recent months, is the benchmark Aussie index too concentrated in a handful of ASX 200 shares?
Why a few ASX 200 shares dominate the index
The ASX 200 index is a float-adjusted, market-capitalisation weighted index. This means each stock is given a weighting based on its size, with the index making up around 80% of the total Aussie share market.
Those with the largest market caps are some of Australia’s most recognisable names. Headlining the list is the top-ranked Commonwealth Bank ($149.5 billion) followed by CSL ($136.6 billion).
Coming in just behind are BHP Group Ltd (ASX: BHP) and the remaining big four banks. Rounding out the top 10 are Woolworths Group Ltd (ASX: WOW), Macquarie Group Ltd (ASX: MQG), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS).
Together, these top 10 ASX 200 shares are worth a touch over $1 trillion. In a roughly $2 trillion index, that means a huge percentage of your investment rests on these 10 names.
You’ll also notice that 5 of the top 10 are banking stocks, which indicates the economy’s reliance on them.
How can you diversify?
The key to reducing individual risk in a stock is to diversify your portfolio. That could mean you’re buying up on real estate investment trusts (REITs) like Scentre Group for additional income.
If you want to really protect your portfolio, a good mix of industry sectors is a good idea. Defensive protection from ASX 200 shares like St Barbara Ltd (ASX: SBM) or Origin Energy Ltd (ASX: ORG) could help.
Growth investors might choose Nearmap Ltd (ASX: NEA) as a way to gain exposure outside of the ASX 200 banking shares.
There’s no doubt the ASX 200 shares are dominated by the Financials and Materials sectors. The key is to be smart with your investments and choose high-quality stocks for the long term.
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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited, Nearmap Ltd., and Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited and Wesfarmers Limited. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.