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Exploring Anti-Concentration Funds From a European Perspective
How do ETFs that reduce exposure to the largest US stocks fit into a diversified portfolio?
Key Takeaways
An anti-concentration fund is one that attempts to divert exposure away from a particular sector or security, like technology.
Popular anti-concentration strategies include the “equal weight approach,” the “exclusionary approach,” and the “invest in mid-caps approach.”
When evaluating these funds as tools to reduce concentration, investors should be mindful of what they are simultaneously betting for or against.
Rising concentration has become one of the defining features of modern equity markets over the past decade. Concentration is when a single security or sector, like technology, makes up a significant portion of a portfolio. The “Magnificent Seven” technology stocks, which include Alphabet (Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla have performed so well over the past decade that they’ve garnered a ton of investment and therefore increased their concentration in many portfolios.
With increasing risk making up plenty of headlines, what could European investors with a lot of exposure to US tech stocks do to decrease that concentration? Morningstar analyzed three strategies and five exchange-traded funds (ETFs) with a mind to do just that.
This article is an adaption of the Morningstar research report Losing Concentration: Exploring Anti-Concentration Funds. Download the free report for more robust commentary and analysis.
Three Anti-Concentration Strategies
Current geopolitical reasons add to concentration risk, particularly in the tech sector. President Trump’s tariffs, Elon Musk’s involvement in the US government, and Chinese AI companies like DeepSeek are among the most obvious.
But investment into European-domiciled anti-concentration US equity ETFs began to increase even before those popped up. The last two quarters of 2024 saw an estimated $18 billion flow into these funds. But let’s not get too caught up in the cause and instead focus on risk mitigation through three anti-concentration strategies.
- Selecting an equally weighted index-tracking passive fund
- Equally weighted indexes deliberately ignore the market’s consensus opinion on the relative value of each firm. By assigning equal weight to all stocks, you reduce the influence of the largest companies and increase the impact of smaller companies on returns versus standard market cap indexes.
- Selecting a fund that excludes mega caps
- These funds track indexes that exclude the stocks with the highest market capitalizations. They differ from the equally weighted approach in that the remaining index constituents are weighted by market capitalization.
- Selecting a fund that focuses on mid-cap stocks
- A more drastic way to diversify away from mega- and large-cap stocks is to look further down the market-cap spectrum and consider mid-cap stocks.
A Comparison of Two Equal Weight Funds
The S&P 500 Equal Weight Index is based on the standard S&P 500 and contains the same constituents. Since there are around 500 stocks, each constituent’s weight is reset quarterly to 1/500, or 0.2%.
The Nasdaq-100 Equal Weighted Index is based on the Nasdaq-100, which consists of the 100 largest nonfinancial firms listed on the Nasdaq exchange. At each quarterly rebalancing, the weight of each constituent is reset to 1%.
Overall, the S&P 500 and Nasdaq-100 capture distinct but overlapping segments of the US equity market. The S&P 500 provides a broader portfolio, reaching further down the market-cap spectrum, while the Nasdaq-100 is more focused on larger companies. This difference is reflected in their equal-weighted versions.
The Nasdaq-100 Equal-Weighted Index diversifies less from mega-cap and large-cap exposure than the S&P 500 Equal-Weight Index does. The Process rating of Average for funds tracking the S&P 500 Equal Weighted Index reflects Morningstar’s reservations about their effectiveness as long-term investment propositions.
However, given its broader scope and greater focus on smaller stocks, the equal-weighted S&P 500, rather than the equal-weighted Nasdaq-100, may be a more appropriate choice for investors seeking a tactical anti-concentration play.
The S&P 500 and Nasdaq-100 capture distinct but overlapping segments of the US equity market.
A Comparison of Two Exclusionary Funds
At present, the only two ETFs available in Europe that exclude mega-cap stocks are Amundi MSCI USA Ex Mega Cap and iShares Nasdaq-100 ex Top 30. The MSCI USA Ex Mega Cap Select Index starts with the MSCI USA Index as its base, then removes the constituents of the MSCI USA Mega Cap Select Index, which includes the largest 30 to 50 stocks within the MSCI USA Index. Meanwhile, the Nasdaq-100 ex Top 30 UCITS Index includes the 70 smallest companies from the Nasdaq-100.
Interestingly, when we compare their size exposures using size scores, both funds are making very similar aggregated size bets. However, the ex Top 30 Nasdaq strategy faces many of the same challenges highlighted by its equally weighted counterpart in the previous section. These challenges include a narrow investment universe, arbitrary inclusion practices, and sector biases away from financials and towards technology.
At present, the only two ETFs available in Europe that exclude mega-cap stocks are Amundi MSCI USA Ex Mega Cap and iShares Nasdaq-100 ex Top 30.
A Review of One Mid-Cap Fund
One of the few options available to European investors seeking exposure to US mid-cap stocks is SPDR S&P 400 US Mid Cap ETF. This ETF physically replicates the S&P MidCap 400 Index, which is designed to ensure that its holdings don't overlap with those of the S&P 500. The strategy captures approximately 5% of the total US stock market capitalization.
This ETF sits in the EAA Fund US Mid-Cap Equity category. Morningstar rates this strategy with a Process Pillar rating of High, reflecting its solidly constructed market-cap benchmark, which is largely representative of the US mid-cap segment.
Morningstar has a positive view of this strategy based on its potential to outperform other mid-cap peers over the long term. As a tactical tool for a shorter-term anti-concentration bet, it represents an investment in mid-caps rather than a tilt away from mega-caps.
The SPDR S&P 400 US Mid Cap ETF replicates the S&P MidCap 400 Index, which is designed to ensure that its holdings don't overlap with those of the S&P 500.
Be Mindful of Your Goals When Investing in Anti-Concentration Funds
Diversifying away from mega-cap stocks involves different strategic bets, depending on the chosen approach and the stock universe defined by the parent benchmarks. European investors seeking to reduce concentration risk typically don't sell their entire broad-market allocation but instead replace a portion of it with one of the anti-concentration funds we've featured above to manage risk.
When evaluating these funds as tactical tools to help investors reduce concentration in their equity portfolios, investors should be mindful of what they are simultaneously betting for or against when aiming to reduce concentration risk.
For more robust commentary and analysis of these anti-concentration strategies and funds, download the free report, Losing Concentration: Exploring Anti-Concentration Funds.
