Many investors look to international equities to diversify their portfolio and access growth industries underrepresented in the Australian market.
One way to do this is through ASX ETFs.
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Why invest in US stocks?
ASX investors may choose to target US stocks to gain exposure to the world's largest and most diverse equity market.
This includes global leaders in technology, healthcare, and consumer sectors that have limited representation on the Australian market.
Investing in US equities can enhance portfolio diversification, provide access to companies with strong long-term growth potential, and reduce reliance on the performance of the Australian economy and resource-focused industries.
One of the most common ways to gain exposure to these equities is through an ASX ETF that tracks the S&P 500 Index (SP: .INX).
The S&P 500 and overconcentration
The S&P 500 is widely regarded as the benchmark for the US share market.
It tracks 500 of the largest publicly listed companies across a broad range of industries.
While it provides investors with exposure to many of the world's leading businesses, it is a market capitalisation-weighted index, meaning the largest companies receive the greatest weighting.
In recent years, the S&P 500 has become increasingly concentrated, with a handful of mega-cap technology companies accounting for a significant share of the index.
This concentration is similar to the S&P/ASX 200 Index (ASX: XJO), where the largest holdings – particularly the major banks and mining companies – can dominate overall performance.
As a result, investors may have less diversification than they expect, with returns becoming heavily influenced by a relatively small number of stocks.
Equal-weight ASX ETF
Investors looking to gain exposure to the S&P 500, without overly concentrating on a few mega-cap companies, may want to consider the BetaShares S&P 500 Equal Weight ETF (ASX: QUS).
As the name suggests, it provides exposure to 500 leading listed US companies, with each holding in the index weighted equally.
The result is a more balanced portfolio that can provide broader participation in the performance of the US market, rather than relying predominantly on a handful of mega-cap stocks.
No individual stock makes up more than 0.3% of the portfolio.
The pros and cons of equal weight
By allocating the same weight to every company, this ASX ETF reduces reliance on a handful of mega-cap stocks and provides greater exposure to medium-sized businesses that may have stronger growth potential.
It also follows a disciplined rebalancing process, trimming positions that have risen strongly and adding to those that have underperformed.
However, equal-weight investing also has trade-offs.
It may underperform during periods when the largest companies dominate market returns, as has been the case during some technology-led bull markets.
As a result, investors should view equal-weight ETFs as an alternative way to gain diversified exposure to the US market rather than a guaranteed source of higher returns.
