What should I do about market concentration?
Key takeaways
Highest concentration
Market concentration has been the highest in 45 years because of Magnificent Seven stocks, and more broadly, mega-caps.
Tech underweight
The average advisor is underweight tech, and they’re concerned with the absolute percentage in tech, which is over 30%.
Concentration solution
Rather than choosing similar sector/factor exposure, look at valuations of various indexes relative to the S&P 500.
Market concentration has been the highest it’s been in 45 years. It’s because of the Magnificent Seven, also called Mag 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla), and more broadly, mega cap (See chart below.)
It has become difficult for advisors to keep up with the amount of tech exposure in passive benchmarks, which has left the average advisor underweight. Advisors aren’t interested in running away from tech but are asking what to pair with tech-heavy strategies. Most use some form of passive investment, like the S&P 500, which has 47% tech exposure. Another popular strategy is the Nasdaq 100, which has over 73% tech exposure.
Even though the average advisor is underweight tech (see chart below), they’re still concerned with the absolute percentage in tech, which is more than 30%. Tech will still have a meaningful impact on total returns, however, whether they're underweight or not.
Considerations
Consider a strategy that has the potential to outperform in different environments rather than choosing similar sector/factor exposure strategies. Valuation dispersions can help guide portfolio diversification. By owning a mix of assets across the valuation spectrum, you automatically include some cheaper, more attractively priced markets. Those differences highlight where long-term opportunities may lie.
Advisor portfolio trends
See what your peers are doing with their portfolios, what worked and didn't work, and get more insight on investing trends that our Solutions team is seeing from their advisor portfolio reviews.
