Catherine Yoshimoto
- The Magnificent Seven now constitute 28% of the Russell 1000, with the top ten holdings representing 32%, as of July 31, 2024 — an unprecedented level of concentration.
- Discover how FTSE Russell tackles market concentration risks with capped indexes, balancing tech giant dominance and investor protection.
- Regulated Investment Company (RIC) rules restrict aggregate weights of companies with >5% weight to 50% (5/50 limit) and individual company weights to 25%.
Bumping up against investment company limits
Several types of common investment companies and funds are subject to security concentration limits that are designed to ensure diversification and protect fund investors.
For example, Regulated Investment Company (RIC) capping rules for US-registered funds require that the aggregate share of companies with weights greater than 5% be limited to 50% (known as the 5/50 limit), and that no individual company have a weight greater than 25% of the fund.
Investment companies and funds may also need to adhere to a tighter, “diversified company” definition, which is set forth by the Investment Company Act of 1940 (“40 Act”). This implies that the aggregate share of companies with weights greater than 5% be limited to 25% (and is known as the 5/25 limit).
If we examine some of our market cap-weighted Russell US Indexes, we can observe how the gains achieved by the Magnificent Seven have impacted their index weights. The chart below shows that the aggregate weights of constituents with a weight greater than 5% in the Russell Top 50 index, Russell Top 200 Growth Index, and Russell 1000 Growth Index have breached the 25% 40 Act concentration limit and are near or above the 50% RIC concentration limit.
Aggregate weights of market cap weighted index constituents >5%
Source: FTSE Russell, as of June 28, 2024. Please see the end for important legal disclosures.
Capped indexes address concentration risk
In accordance with the FTSE Russell Policy for Benchmark Methodology Changes, we’ve consulted with clients and external committees on the treatment of larger constituent weights. The general feedback had been that market cap-weighted indexes—such as our Russell US Indexes—should reflect the market, and so should remain uncapped.
However, market trends—such as the dominance of the Magnificent Seven—shed light on the needs of clients who require capping methodologies applied to the indexes. To address these needs, we’ve launched various capped indexes that are derived from the standard (cap-weighted) indexes.
Constituents in our RIC Capped indexes, for example, are capped quarterly so that no more than 20% of the given index’s weight may be allocated to a single constituent, and the sum of the weights of all constituents representing more than 4.5% of the index should not exceed 48% of the total index weight.
In our 40 Act Daily Capped indexes, our quarterly reviews ensure that all companies with a weight greater than 4.5% in aggregate are no more than 22.5% of the index, and no individual company in the index had a weight greater than 22.5% of the index. These indexes are monitored daily to ensure that constituent weights do not breach 40 Act thresholds.
Capping brings the Magnificent Seven back down to Earth
A closer look at the Russell Top 200 Growth RIC Capped Index illustrates the impact of capping large constituents, including some members of the Magnificent Seven. As shown, our capping methodology pares certain weights compared to the Russell Top 200 Growth Index. FTSE Russell is also consulting on whether to cap the standard Russell US Style Indexes: Index Market Consultations.
| Index constituent | Russell Top 200 Growth | Russell Top 200 Growth RIC Capped | Difference |
|---|---|---|---|
| Microsoft | 13.2% | 11.8% | -1.5% |
| Apple | 12.2% | 11.0% | -1.2% |
| Nvidia | 11.7% | 10.7% | -1.0% |
| Amazon.com | 6.9% | 6.5% | -0.4% |
| Alphabet Cl A | 4.3% | 4.1% | -0.2% |
| Alphabet Cl C | 3.7% | 3.5% | -0.2% |
| Weight of companies >5% | 52.0% | 47.6% | -4.4% |
Source: FTSE Russell, data as of US market close on June 28, 2024. Alphabet company weight includes both Class A and Class C shares.
In essence, while our cap weighted indexes are an accurate reflection of the current market, markets can move in uneven ways, spurring demand for capped indexes. Please see our capped index methodology for more information. In another insight, we review past episodes of market and index concentration from a global perspective
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