Due to increased concentration risk in equity markets that are ‘crammed’ into US (tech) stocks, asset managers are experiencing increased demand for rules-based ETFs. These trackers reduce that risk or exclude the market segment with the highest concentration risk.
‘The less intervention, the better’ was the credo among asset managers for years, but the concentration risk increasing since last summer is changing the rules of the game. Where US-exceptionalism was hailed last year, a new sentiment entered the market at the turn of the year. ‘With 75 per cent of the global equity market made up of US stocks with a high allocation to tech, investors feel the need to make their asset allocation more specific,’ said Brett Pybus, head of iShares EMEA Product Strategy at Blackrock.
ETF providers’ answer to that need is “rules-based” investment vehicles, which make portfolios a little less top-heavy by excluding the high-concentration portion of the benchmark. Blackrock recently launched two exclusion-based ETFs, the iShares Nasdaq 100 ex-Top 30 UCITS ETF and iShares MSCI World Ex-USA UCITS ETF. These allow investors to better control exposure to the US and tech megacaps in their allocation, with more sophisticated instruments.
Another asset manager, Invesco, has five equal weight ETFs: two on the S&P500, one on the Nasdaq, one global and a European equal weight ETF to be launched next week. Each company in the benchmark of such an ETF gets the same weighting and is reweighted on a monthly basis. The Ucits variant of the Invesco S&P500 equal weight ETF saw inflows of 100 million euros last year, says sales manager Jolien Brouwer, and she considers that ‘a remarkable development, considering that equal weight has shown underperformance against market cap since 2015. It highlights the desire to take risk off the table through better diversification.’
Underperformance
Investors are looking for ways to reduce concentration risk and are doing so by diversifying. ‘Equal weight ETFs provide an even spread, giving top companies less weight and smallcaps more, another diversification profile,’ says Brewer. ‘Interestingly, despite the underperformance of the past decade, demand for equal weight ETFs has increased. Normally you would say the underperformance makes for a hard sell, but the urgency to take risk off the table weighs more heavily.’
Brouwer explains that the equal weight strategy performs cyclically, with alternating periods of underperformance and outperformance. ‘If you look at the period since 1989, you see four times when equal weight lagged, sometimes by as much as 25 per cent relative to market-weighted indices. But each phase of underperformance was followed by an equally long period of outperformance, with a recovery rate of almost 100 per cent.’ So far in 2025, the equal-weight ETF version of the S&P500 outperforms the market-weighted ETF by about 80 basis points.
While interest in this strategy has increased, investors have not fully traded market-weighted ETFs - often the core of the portfolio. ‘The portfolio is not suddenly completely flipped to equal weight, but rather subtly adjusted to add nuances,’ Brouwer explains. ‘By using an 80/20 allocation, where 80 per cent remains market-weighted and 20 per cent equal weight is added, the risk-return profile can be optimised.’
Exclusions
Exclusion-based ETFs allow investors to exclude the US, for example, ‘European investors often have a home bias and prefer a moderate allocation to the US,’ Pybus (Blackrock) explains.
Excluding the US paid off in 2025. While the global ETF achieved an annualised return of 3.61 per cent, the version without US equities rose to a return of 6.54 per cent.
‘Some actually want to make their US allocation more specific by adjusting their weighting towards the technology sector,’ Pybus says. ‘The iShares Nasdaq 100 ex-Top 30 UCITS ETF strips out the 30 largest companies within the Nasdaq and appeals to investors who seek exposure to technology but are concerned about the dominance of the Magnificent Seven.’
The weighting of the top 10 companies drops from 50.9 per cent in the traditional benchmark to 25.4 per cent in the adjusted portfolio. By excluding the 30 biggest names, the annualised return rose to 6.56 per cent, compared with 1.66 per cent in the standard Nasdaq index.