FIRE

[Corola]

Equity indexes use a company’s market capitalisation to decide how much weight its shares will have in the index.

That depends on the index.

By definition, an index cannot be overweight any particular company or sector.

The S&P500 Equal Weight Index invests 0.2% in the top 500 companies in the US. The top 10 stocks make up 2% of the index.

Is that more or less diversified than the regular S&P500 where the top 10 stocks make up 35% of the index?

 

[Sarenco]

Yes, equal weighted indexes do exist but the indexes we are discussing here (MSCI World, S&P500, FTSE100, etc) are all market cap weighted.

 

[Corola]

But if you overweight or underweight any particular security, country or sector relative to the market, you are actually creating a less diversified portfolio.

If I invest in S&P500 Equal Weight then based on market cap I will be underweight in the tech sector. But how am I less diversified? I have all the same stocks but I'm less exposed to individual large companies like Apple, Nvidia, etc.

 

[bkenn14]

Will global warming and over consumption put a damper on stock and bonds and blindside people thinking of retiring early who are expecting stocks and bonds and pension pots to keep increasing until the depart this world,

Global warming and over consumption have no borders or sectors there is a good chance action will not be taken in time so as not to affect stocks and bonds and then the handbrake will be applied all of a sudden,

Wealth created trough labor/work will have a higher value/ reward than all other types of wealth,

 

[Sarenco]

@Corola

Ultimately the whole point of diversifying a portfolio is to increase risk-adjusted returns.

Over the 10 years to 31 March 2025, the S&P500 Equal Weight index produced a materially lower return than the S&P500 and it did so with materially greater volatility.

So, inferior risk-adjusted returns.

 

[Corola]

And over the previous 10 years it didn't.

Cap-weight has outperformed equal-weight so much in recent years precisely because it's become so concentrated in the Magnificent 7 who have been so magnificent.

 

[joe sod]

The msci world had 44.8% US stocks in 2011, 57.8% in 2021 and in 2025 75% US I believe. Is this the first big test of these global ETFs and funds as they all have large US and tech exposure. In 2008 crash ETFs were still small in terms of investment so wouldn't have had much effect on the overall market. In 2020 covid they were large but the crash was short lived and the theme of US tech being predominant was actually reinforced by covid so the ETFs were in tune with all that . However now it is the US itself and tech stocks in particular that are suddenly out of favour and getting sold off, so what happens when the ETFs have to reflect the market weights of the stocks aswell then they are also selling US stocks into a falling market to buy other stocks that are now rising. Is there a danger that they are also reinforcing the sell off of US tech?

 

[Sarenco]

@Corola

Over the full life of the S&P500 Equal Weighted Index, from launch in January 2003 to date, it has (modestly) underperformed the S&P500.

But more importantly, the Equal Weighted Index has displayed greater standard deviation than the S&P500 over that time period.

So, over the full life of the S&P500 Equal Weighted index it has not produced a greater risk-adjusted return than the S&P500.

 

[Sarenco]

@joe sod

You seem to have a fundamental misunderstanding of the mechanics of how index funds work.

The fund manager doesn’t have to sell anything to reflect the closing price of a security in the fund’s NAV.

 

[Corola]

Higher risk-adjusted return isn't the only measure of diversification. Over that period S&P500 (market cap) also has higher return and lower standard deviation than MSCI World/ACWI. That doesn't mean global equities are less diversified than US equities.

Correlation and concentration are important too. You don't want lots of your portfolio going down at the same time, which is more likely if you're highly exposed to one country or sector, like US tech.

 

[ClubMan]

Are you sure about that a quick google shows it has 47% of its stock portfolio in just 3 companies, Apple , American Express and Bank of America

Stock portfolio is only one part of the BH pie. Owned/controlled businesses and cash/equivalents are the others. And besides, Apple sell their products and services worldwide.