The peril of market cap weighted ETF’s

The top 10 Australian stocks (as per market capitalisation) account for 47% of the weighting in the ASX 200 equity index.

The other 190 stocks make up the remaining 53%.

Loosely put another way, 11 cents of every $1 invested in an ASX 200 index strategy (think monthly superannuation contributions) goes towards buying BHP stock. Then a further 8 cents of each $1 buys CBA shares, another 6 cents is spent on buying CSL and 4 more cents acquires shares in National Australia Bank.

There you have the top 4 stocks making up 29% of the ASX 200.

Much has been mentioned about the top 10 U.S. stocks adding up to 30% of the S&P 500 market weighting.

There is much peril in market capitalisation weighted indices (and their #etfs).

In the absence of seeking a bargain let alone considering prevailing valuations nor conducting any analysis, many investors are showing fiscal complacency by hiding in large caps stocks and convincing themselves about the safety of ‘blue chips’.

There are other places to allocate equity monies.

January 4, 2023

by Rob Zdravevski

rob@karriasset.com.au