Mark Barnes, PhD,
Indhu Raghavan, CFA,
- Understanding country, industry and stock concentrations in global equities today is important to monitor risk, interpret what is driving markets and form expectations of market opportunities.
- US stocks account for over three-quarters of the top 250 stocks in the FTSE All-World index by weight, and Technology accounts for over a third of the top 250 stocks’ index weight.
- Single US Tech stocks have a larger representation in the global index than most country group of equities. They potentially bring large idiosyncratic or company-specific risk to equity portfolios that is likely to be a feature of investing in today’s global equity markets.
The recent volatility in the share price of Nvidia has created quite a stir, with the market value of the company falling nearly US$ 430 billion in a few days. This knocked it off its throne as the world’s largest company (by market capitalisation) as of the time of writing, which incidentally, it had ascended to only earlier in June. This volatility is certainly of interest to investors in Nvidia shares, but it is also of interest to investors in portfolios linked to indices that include Nvidia. This is not an article on Nvidia but rather an article reminding investors of the concentrations we see in global equity markets resulting in a heightened sensitivity of portfolios to the fortunes of certain market segments or even single stocks. We look at the concentration of global equity markets along the country, industry, and stock dimensions.
We use the FTSE All-World index as a representation of the global equity market. As of 31 May 2024, there were 4286 stocks in the index, representing 11 industries and 49 developed and emerging countries. The industries are based on the ICB classification. It is widely known that the US has the largest equity market by capitalization, and that Technology has dominated the US equity market recently (see link for a history of the US equity market changes over the last 40 years). Indeed, as of the end of May, the US accounted for 62.1% of the All-World index by weight, with Technology accounting for 27.1%.
When we think of concentration, we think of a large portion of index weight being accounted for by disproportionately few assets or asset groups. In the case of market-capitalisation weighted indices, examining concentration among the largest stocks by weight provides a different perspective on concentration. Exhibit 1 shows the weight in the FTSE All-World index by stock rank group. In other words, if all 4286 stocks are ranked from largest to smallest in terms of index weight, the largest 50 stocks account for 36.9% of index weight, the next two hundred account for 26.3%, etc., with the last 1786 stocks accounting for a mere 1.4%.
Exhibit 1. FTSE All-World index weight, by stock rank group
Source: FTSE Russell, as of May 31, 2024. Please see the end for important legal disclosures.
To get a better understanding of the concentration at the largest end of the global equity market, we dive into the composition of the top 250 stocks. While 250 is admittedly an arbitrary cut-off, this does allow us to focus on the largest stocks, and these 250 stocks account for 63.2% of index weight so we are accounting for almost two thirds of the index weight.
We start with the country dimension. Exhibit 2 shows the number of stocks by country in this group of the largest 250 stocks. Of the 49 countries in the index, 18 are represented in the top 250 stocks, and half of those countries have three or fewer stocks in this select group. Clearly, what jumps out is that the US accounts for 158 of the 250 stocks.
Exhibit 2. FTSE All-World top 250 stocks, by country
Source: FTSE Russell, as of May 31, 2024. Please see the end for important legal disclosures.
Perhaps more important is the index weight. Exhibit 3 shows the country index weight of the top 250 stocks in the FTSE All-World index (weights in the top 250 stocks add up to the 63.2% of total index weight). Again, we see some countries with rather small representations, including six countries with weights under 0.5% and only the US having a weight above 2%. The concentration in the US is seen here with the US accounting for 48.8% of the 63.2% (or over three-quarters) of the top 250 stocks’ index weight. In other words, while the US accounted for 62.1% of the entire index by weight, it represented three-quarters of the top 250 stocks by weight.
Exhibit 3. FTSE All-World top 250 stocks’ index weight, by country (sums to 63.2%)
Source: FTSE Russell, as of May 31, 2024. Please see the end for important legal disclosures.
Another dimension along which we can see concentration is industry. Exhibit 4 shows the industry index weight of the top 250 stocks in the FTSE All-World. While the industry distribution is not as skewed as the country distribution, we do see a handful of industries with quite low weights. However, there are also a few industries with moderate weights: Discretionary, Financials, Health Care, and Industrials. Perhaps unsurprisingly, given the recent growth in the technology industry, the largest weight is in Technology, which accounts for 23.4%. Said differently, Technology accounts for over a third of the top 250 stocks’ index weight.
Exhibit 4. FTSE All-World top 250 stocks’ index weight, by industry (sums to 63.2%).
Source: FTSE Russell, as of May 31, 2024. Please see the end for important legal disclosures
The country and industry concentration effects overlap in US Technology. To further illustrate this, exhibit 5 shows the top 30 “assets” by index weight. In this case, “assets” are a mix of US stocks and the aggregate weights for each non-US country. For example, Japan is the largest “asset” with 6.10% of index weight, but it is followed by Microsoft with 4.22% and Apple with 3.83%. UK equities are the fourth “asset” with Nvidia close behind. It is important to note that a single stock such as any one of these US Tech giants, with their idiosyncratic company-specific risk, could exert a potentially larger influence on the index than any of the country group of equities (that are industry diversified in principle), which trail them by index weight.
While US Tech stocks are important (making up three of the top five “assets”), it should be noted that they are not the only US stocks on this list. We also see Amazon.com (Discretionary), Lilly (Ely) (Health Care), JP Morgan Chase (Finance), and Exxon Mobile (Energy). However, the seven US Tech stocks on this list account for 16.38% of the total FTSE All-World Index weight.
Exhibit 5. FTSE All-World top 30 “assets” by index weight.
Source: FTSE Russell, as of May 31, 2024. Please see the end for important legal disclosures.
Conclusion
Index composition is important for investors for several reasons, ranging from risk monitoring to interpreting what is driving markets to forming expectations of market opportunities. This insight captures one aspect of the current state of global equity markets by pointing out the concentration in US stocks, and particularly in US Tech stocks. While the US’s and Technology’s predominance in global equity markets is well known, their dominance of the largest stocks by market capitalisation offers a different perspective. Single US Tech names represent a larger portion of the global equity index than many country groups of equities. They potentially bring large idiosyncratic or company specific risk to equity portfolios that is likely to be a feature of investing in today’s global equity markets.
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