ASX ETFs are a great way to gain broad market exposure in just one trade.
Tracking indexes like the S&P/ASX 200 Index (ASX: XJO) or S&P 500 Index (SP: .INX) is a great foundation for a portfolio.
However it's important for investors to understand how concentrated the ASX 200 is to just a handful of companies.
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The most concentrated share market in the world
A new report from VanEck has shed light on how the ASX 200 differs from other global benchmarks.
In fact, the ASX 200 is one of the most concentrated developed-market indices on the planet.
According to VanEck, the top 5 securities account for 32.73% of the S&P/ASX 200 Index:
- BHP Group Ltd (ASX: BHP) represents 9.53%.
- Commonwealth Bank of Australia (ASX: CBA) 9.27%
- National Australia Bank Ltd (ASX: NAB) 4.93%
- Westpac Banking Corp (ASX: WBC) 4.93%
- ANZ Group Holdings Ltd (ASX: ANZ) 4.06%.
The Australian share market is structurally overweight materials and financials, and structurally underweight technology and global growth.
If you own the index, you own the concentration. We're not saying, don't own the banks, we're saying, it's worth pondering if it warrants such a large allocation.
A solution for managing concentration risk
There are ASX ETFs that aim to provide a direct return of the ASX 200 and along with it, an overweight towards banks and materials.
Some investors will be content with tracking the ASX 200 at its current weighting.
VanEck contends that an alternative to this strategy is the VanEck Vectors Australian Equal Weight ETF (ASX: MVW).
As the name suggests, it aims for true diversification by equally weighting across companies and reducing sector concentration.
MVW has less exposure to the mega-caps that dominate the S&P/ASX 200 Index compared to many Australian equity portfolios. MVW is underweight mega cap companies and overweight those large companies outside the mega-caps. Relative to the S&P/ASX 200, MVW has a higher weighting to stocks outside the top 15.
What's in the fund?
At the time of writing, it is made up of 76 holdings, with no individual holding representing more than 1.6% of the total fund.
By sector, its largest allocation is to:
- Materials (20.1%)
- Financials (18.7%)
- Industrials (16.3%).
VanEck argues this can provide resilience across various market cycles, avoiding concentration risk inherent in traditional market cap indices.
For investors focused on long-term stability and enhanced diversification, MVW's equal-weighted approach offers a compelling alternative for core Australian equities.
