Is it time to dump global trackers as portfolios become more concentrated?

Many investors follow the mantra of putting money into a global tracker to gain access to the best performing companies in the world for your portfolio.

But this investment wisdom is coming under threat as global index funds become less diverse.

Research by Wealth Club found global trackers are becoming concentrated towards technology stocks amid the strong performance of brands such as the 'Magnificent 7.'

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This increased concentration could be putting investor funds at risk though due to a lack of diversification.

“For the past decade or so, collective wisdom when it comes to investing has said you should just stick your money in a global tracker and leave it at that,” says Nicholas Hyett, investment manager at Wealth Club.

“After all, what better diversification could there be than investing a little bit in every listed company in the world?

“Historically that approach has delivered great returns. The iShares MSCI World ETF has returned 200% over the past ten years. However, the very success of that strategy means it might not be such good advice in future.”

So is it time to dump your global tracker and where should you look instead?

The good and bad side of global trackers

Investing through a global tracker has traditionally been good practice. 

Rather than finding an active fund that may struggle to beat the market and charge high fees, a tracker gives you low cost access to the best performing companies in the world, usually diversified across different regions and sectors.

Global trackers tend to be weighted to the largest companies by market capitalisation.

This type of strategy worked back in 2009 when the ten largest companies in the world accounted for 9.6% of all money invested in the iShares MSCI World ETF, which tracks the MSCI World index. 

Fast forward to today, and the top ten largest companies now account for 21.4% of the same tracker fund.

A global tracker portfolio in 2009 would have given you a mix of energy, financial and consumer stocks, while only three were from technology.

Nowadays, around 80% to 90% of the top 10 of a tracker fund is weighted towards technology, according to Wealth Club.

Hyett warns that increased concentration, both in fewer stocks and fewer sectors, adds to the risk of a global tracker.

“There is a perception that investing in a global stock market tracker is a lower risk way to invest,” says Hyett.

“That may be true compared to investing in a handful of individual companies, but lower risk doesn’t mean no risk.”

He highlights that during the 2008 financial crisis, the global stock market fell almost 40% over around 18 months, while today’s “more concentrated stock market” is more prone to substantial falls in value.

“For long term investors that wasn’t actually too much to worry about,” Hyett says.

“It had recovered within about 12 months and is now some four times higher.

“But for investors who thought they were picking a lower risk investment option, seeing 40% wiped off their hard-earned savings would have created a strong urge to sell.

"Unfortunately, research suggests retail investors often do sell after big falls, and don’t reinvest until the market has recovered. They participate in most of the losses, but not all of the gains.”

Should you dump your global tracker?

Global trackers may be concentrated or more risky than usual but the question is can you find a better performing alternative.

Research by AJ Bell last year found just 36% of active managers beat the average passive alternative in 2023 across seven key equity sectors.

Philip Dragoumis, director at Thera Wealth Management, agrees and adds that the market often goes through concentrated periods.

 “Throughout the last hundred of years there have been many times when the market has been concentrated around one group of stocks, or one geography or one sector,” he says

 “Global Index returns have not been the worse for it.

 “The market capitalisation weighted Global equity index is merely the outcome of the trillions of dollars of daily transactions of global investors. This index is extremely hard to beat after active manager costs as the overwhelming majority of active fund managers discover every year.”

Where to invest instead

You could instead build a diversified portfolio of different trackers but you need to work out the cost of each fund compared with having just one.

Hyett suggests investing in a wider range of funds, especially outside of the US, will mean you aren’t as exposed to just a few companies.

 “Investors might consider European or Asian funds, or those investing in smaller companies. That could include passive index funds or actively managed funds,” he adds.

 “Alternatively you could consider funds investing in corporate or government bonds – which can help insulate a portfolio from some volatility.

 “Ultimately building a really strong portfolio is all about merging a diverse range of investments together. A global tracker fund is a good start, but it’s only the start. Don’t fall into the “whack it in a tracker” trap this tax year.”