Buying an Index Feels Diversified — But Is It Always?

Buying an index can make you feel like your money is well diversified. The S&P 500 has 500 companies and a global tracker can hold thousands. But that does not mean your money is spread evenly across all of them. Most indices are weighted towards the biggest companies, so a large chunk of your investment can still sit in just a few stocks.

South Korea is a good example. SK Hynix and Samsung Electronics make up around 47% of the major South Korean stock market index between them, while the top ten stocks make up around 61%. Australia is another surprisingly concentrated market. BHP and Commonwealth Bank alone make up almost 29% of the MSCI Australia index, with the top ten accounting for around 65%.

The S&P 500 is less concentrated, but the Magnificent Seven still account for around 34% of the whole index, with Nvidia, Apple and Microsoft alone making up about 21%. You might think going global would solve this, but there is still quite a bit of overlap. Nvidia, Apple and Microsoft make up almost 13% of the MSCI ACWI, while the top ten stocks account for around 24.5%.

The UK sits somewhere in between. The top ten companies in the FTSE 100 make up around 49% of the index, so almost half of your money is still in just ten companies. Europe excluding the UK is much more spread out, with its top ten companies making up only around 24%. So while both give you exposure to a large number of companies, the actual level of concentration can be very different.

This does not mean trackers are a bad investment. They are still one of the easiest and cheapest ways to invest across a large number of companies. It is just worth looking under the bonnet and seeing what you actually own. The number of stocks in an index only tells you part of the story — how much is invested in the biggest companies matters just as much.