This article by Monevator contributor Longshore Drift explains how he is recovering from a passive concentration problem.
Passive investing using world trackers has served me pretty well. It quietly told me to set aside both my enthusiasms and fears, find the cheapest fund, and let the world get on with it.
“Don’t try to beat the market – buy the market,” they said.
So I did. I put a blind man at the tiller (well, the MSCI World Index) and I have largely sat back and watched.
And through a combination of favourable sequence of returns and some lockdown-enhanced saving, the last few years of very passive investing has put the foundations in, if not for FIRE, then for a living when the work dries up.
Perhaps this explains why I was slow to realise that the good ship ‘Half Decent Retirement’ had shifted from being fuelled by a well-diversified basket of equities across the markets of the developed world, to what has begun to resemble a tech-driven, US momentum fund.
Tech eats World
Just nine companies account for around 28% of the value of my current MSCI World Tracker (SWLD):
- Nvidia
- Apple
- Microsoft
- Amazon,
- Alphabet (in two share classes)
- Broadcom
- Meta
- Tesla
- Micron
That is pretty much the same percentage as all the non-US equities in the developed world that are in the same index!
What’s more, as I write SpaceX is joining the indices, triggering an automatic allocation of billions to a host of funds, adding to the US tech concentration.
Yet jump back only a decade and you’d still find energy, finance, telecoms, and industrials in the top ten. How quaint…
Around 18% of the fund is just in the ‘Magnificent 7’. And roughly 72% of the allocation is US.
For sure the US remains a phenomenal capital growth engine. But from AI froth through to, let’s just say, declining governance standards, it is beginning to seem a little fragile.
Don’t bet against American exceptionalism, people say. Fine. But I’d rather not bet 70% and more on it, in its current state.
What are my chances, MU/TH/UR?
We can then add to this, that companies representing some 30% of the index are broadly betting on AI.
I don’t pretend to understand the very complex, true, long-term impact of AI on the economy or the individual constituents of the MSCI World Index.
But it seems unlikely to me that in an age of AI that the current winners can guarantee their position in the face of something faster, better – or just cheaper – from a competitor.
The ability to generate profits selling AI will likely continue to be challenged by other AI models as yet emerging.
Disruption is rarely neat or contained.
Weights and measures
This kind of concentration from a World Tracker was not what I had signed up for.
Put it all together and it’s almost enough to make you want to give up the game and run for the comforting polyester blanket of an annuity.
So, seeing myself overweight in both tech and American exposure, I found myself complaining about a tracker doing what it is essentially supposed to do.
“Market Cap Weight’s gonna Market Cap Weight”, right?
But I’ve realised I don’t actually want to own the market as it exists today.
Is then an Equal-Weight global market tracker the answer? All things, but in moderation?
Equal weight is the indexing methodology that loves all its children equally, regardless of how they behave. A diverse mix of companies and no tall poppies. The quantised blind stock picker.
So yes, equal weight does sound like the antidote to my problem. It knocks back the US dependency to around 50% and dramatically reduces the technology concentration.
But, well, it just seems boring.
Equal weight feels like you are leaving money on the table as your team of ever-vigilant fund managers work quietly and diligently, day and night, to carefully rotate your funds away from the most highly-valued businesses as fast as they can.
More inertia investment than momentum.
For me, the answer has neither been to embrace the enforced mediocrity of equal-weight indexes, nor to throw off index investing altogether in favour of stock picking based on my own hunches.
Instead I have sought out other indexes that tilt in another direction – the relative stability of high dividend-yielding companies.
I can’t tech it anymore
The VanEck Morningstar Developed Markets Dividend Leaders ETF (Ticker: TDGB) is now a major holding of mine. It has a tech allocation of less than 1% and is around 75% non-US.
Let’s briefly compare the MSCI World to my dividend-tilted escape plan, using the MSCI World ETF (ticker: SWLD) and TDGB as proxies for the two indices.
In terms of number of holdings, TDGB presents a massive concentration of risk when compared with a MSCI World Tracker. It cuts the number of individual companies down from 1,294 to just 101.
And given that TDGB holds a fraction of the number of businesses that a World Tracker does, it is not surprising that the top ten holdings account for a chunky 36% of its value.
However that top rank of dividend payers comprise a varied mix of energy, pharma, consumer goods, communications, and financials. Exactly the kind of companies that have fallen out of the top ranks of the MSCI World Index.
In terms of total number of investments, the risk is concentrated, but in terms of sectors, geographies and froth exposure, it is more appealing to me.
Return post
It’s perhaps a surprise to see that return from the Dividend Leaders ETF has roughly matched that of the World tracker since late 2019 (the furthest back this data source will chart the two ETFs):
Source: Fiscal AI
Although zooming in on the past year’s returns…:
Source: Fiscal AI
…you can see that TDGB has enjoyed quite a growth spurt in 2026.
My reasons for switching assets to this fund were, however, all about my concerns about having so much exposure to this US market, not chasing returns.
Divvied up differently
My overall portfolio now has sub-30% in the US. I still hold a MSCI World Tracker ETF, but from being my largest investment, dominating my retirement plans, it now represents just 15% of my holdings.
This is very much a personal choice. It’s a response to an increasing sense of discomfort around the composition of world tracker funds.
The original appeal of a cap-weight developed world tracker was growth, with the risk shared across many sectors, markets, and companies.
No wonder the dominance of a single sector made me look again.
I may be wrong. US technology could continue to dominate for another decade. But I’m happier owning a portfolio whose risks I understand and can live with than one that leaves me increasingly uncomfortable.
Nice article.
I was surprised to see that most “all world” funds are not all world but developed world and the list of countries excluded from developed world surprised me. No Korea, despite it’s huge developed economy. No China, I can see that it might still be developing but sure it must now be close to developed.
FWIW, a longer comparison between MSCI World and MSCI World High Dividend is available at curvo (search curvo MSCI World MSCI world high dividend, the High Dividend index is still over 50% in the US, but, at 10%, much lower in Tech). Over a period of slightly more than 30 years (since June 1994), the GBP returns have been very similar (8.73% vs 8.75%) while the standard deviation for the High Dividend index was slightly lower at 12.6% compared to 13.7%. However, returns over shorter periods have sometimes favoured the one and sometimes the other.
I hold this ETF based on its consistent performance relative to active global equity funds/IT. The only thing to note is that because it is a Dutch ETF you “lose” 15% withholding tax on dividends if held in a SIPP (and I also assume ISA) – it is too much hassle for the SIPP platform to reclaim from the Dutch. By holding in a standard Trading Account I understand you can at least offset the overseas withholding tax against your HMRC tax liabilities.
This article makes me feel better about my allocation!
25% Vanguard FTSE Developed Europe
25% Vanguard All World High Dividend
50% Vanguard FTSE Global All Cap
Extra Europe for political reasons, and belief that European governments will invest closer to home going forwards.
High Dividend as Tim Hale said it showed a slight edge (I think!)
All Cap because well I don’t actually know anything so just buy it all!
Fortunate to have DB pension which I treat as bond allocation.
Interesting article. What are your thoughts on the Vanguard FTSE All-World High Dividend Yield ETF (VHYG) instead of VanEck?
Things look misleadingly concentrated, but really a lot of US megacaps are multinational in themselves, and saying something is “tech” nowadays is like saying “they do their work on a computer, so that’s tech”
Really, Amazon – retail, Tesla – cars, Google – advertising, Facebook – media, Netflix – movies, SpaceX – engineering, etc
Passive cap weight is the most overcrowded trade of the decade.
And it’s algorithmic. Give money to the tracker provider they immediately and automatically must invest it regardless of price and market concentration. Optimised cap weight index tracker sampling then creates a feedback loop progressively increasing top ‘n’ number index constituents weighting and reducing liquidity in the mega caps per unit of capitalisation.
Thus a (for a very long time) truly fantastic idea (Bogel’s/Vanguard’s) can become a disaster in waiting when everyone does it, and it becomes, in some sense, and within some limit, ‘the market’ (see Mike Green).
An All Weather and/or Permanent Portfolio (ideally with a non equity asset class trend following and/or equity market neutral capital efficient overlay or sleeve, as per the style of Winton Trend Enhanced Global Equity and/or AQR Delphi Fusion) with a very small (5%-10% capped absolute max, to be pound cost averaged into) levered ETF rotation system using QQQ3/3LUS (after a massive drawdown in unlevered QQQ or SPY, with a moving average deleverage trigger) might actually be less risky, and more rewarding, overall than a 100% allocation to VWRL/VWRP. Heresy, but I suspect true.
Thank you @LongshoreDrift for a very thought-provoking article. I’ve had similar concerns for a while but had diversified in a different way using World Value, FTSE 100, Developed Europe (ex UK), Emerging Markets and World Small Cap ETFs. Plus FTSE All-World of course, but now only comprising 8% of my SIPP. I might add TDGB to my list for a bit more peace of mind. I see the charges are 0.38%, which would make it my most expensive ETF.
Would be interesting to hear what else you considered and why you chose TDGB.
Can’t say I agree with @LongshoreDrift here, let’s hope many people aren’t too badly misguided by this article. People forget it’s not professional advice, just a random internet person letting fear dictate their investment strategy!
Competing advice available in publications from J Bogle, JL Collins, Tim Hale, Lars Kroijer, Joe Wiggins, etc..
A global value tilt (using PSRW) and a small cap value tilt (using AVSG) is what I’ve done to dilute my pure VWRP holding in my 100% equities SIPP.
70% VWRP
15% PSRW
15% AVSG
This follows the Tim Hale global tilt to the risk premia.
@Baron — Competing advice isn’t available as such, because as you note this article is not personal investing advice. Nothing on Monevator is or can be (no writing can be when it doesn’t know your personal situation) but it’s even more explictly stated as such in this piece.
It is a (hopefully) thought provoking and relatable piece about facing this increasingly challenging investment climate that we can all read and reflect on, and discuss in the comments.
Just to echo the comment above on the Vanguard FTSE All-World High Dividend Yield ETF (VHYL) – it does not contain any of the “Magnificent Seven” stocks, but does retain a significant US allocation (~40%).
@Matthew Ainsworth #6
> Really, Amazon – retail
By revenue, yes, but if AWS is 74% of profit as TMF indicates then I’d say the tech label is a fair cop, guv. It’s where they make most of their money that matters, not where they take most of it.
Thanks for an interesting article.
I have had similar thoughts/concerns to this, and last year I started to do something about it. Having spent years with 100% of my portfolio in a global market cap weighted fund, I have gradually introduced iShares MSCI World ex-USA (XUSE) to my portfolio, ultimately reducing my US-weighting to ~50%.
I sleep better at night as a result!
Thank you for posting this article,I have been worried about the concentration risk in my FTSE Developed World ex-UK Fund for a while now. Whilst I am a supporter of Index investing, wasn’t it Warren Buffett himself who advocated investing in only what you understand? I’m sure like many, I haven’t a clue how Ai works!
Curious how so many passivistas are losing the faith. I never claimed to be one, but surely the philosophical basis means you have to HODL through thick and thin, why are so many folk taking an active opinion now 😉
I shifted out of a lump of VWRL in favour of VHYL for roughly what Alan S #2 said, but I am an inveterate fiddler. And I lived through one instance of it’s-all-different-now tech euphoria that wasn’t, so I don’t want to drink of that well a second time.
But passive means passive, folks. Else you are starting down that wide left-hand path that leads to – whisper it – active investing.
Thank you for the comments! I’m a little disappointed that no one has accused me of recency bias…
@Dazzle, thank you. In my case “World” is very much developed world, and that is deliberate, though these terms are a little bit outdated, perhaps, when looking at many East Asian markets.
@Matthew Ainsworth — Yes, very multinational in some case. But the US is rather less popular internationally than it used to be. I think Amazon is tech company, that sees itself as a tech company, as well as being a retailer. But when you have woolly trainer companies pivoting into AI, who knows?
@Alan S — yes, there are a few flavours available. My thinking here is not some search for great gains, more a discomfort around the sectoral concentration.
@Ajith — I like it — has a similar performance over five years. Used to hold it. Have a horrible feeling I sold it in error…
@Delta Hedge — Thank you for the comment. It is that feedback loop, combined with the lack of sector diversity, that concerns me.
@Colin Thames. Ta. I have certainly looked at Europe (VEUD), and a couple of FTSE 100 funds. I have also enjoyed Artemis Global Income, of late, though I accept that timing has been kind to me there. Otherwise a bit of value. I was delighted to see IWFV vindicate a value tilt as it shot up recently. Then I noted that is largely because of Micron, a chip company going nuts supplying AI chips and in the top ten of a World Tracker. It is, as you see, no longer undervalued…
@Bad Timer. Yes, this is a ball ache. I’d also rather hold an accumulation ETF, but here we are.
@Baron. You are, of course, correct, I am not a professional financial adviser. Nor am I a random person on the internet, I’m afraid. I’m here because, to paraphrase Barry Took, I am cheap and available at short notice.
@CM — I shall take a look — there it is again, the lesser spotted AVSG!
@Ermine Well, quite. I’m just ringfencing my passivity a bit. Must we be pure? The Dotcom crash put me off single equities for the best part of two decades. You can blame IBG for that…
I was recently involved in a short discussion on Lemon Fool about VanEck (TDGB).
One comment put me off, namely that TDGB dividends are subject to 15% Netherlands withholding tax which is deductible even in an ISA.
Shame about that as it does look attractive otherwise.
TP2
@ermine — I sort of agree, but it is tricky. From my reading of the past (and some of the stuff me and TA have done with, for example, CAPE ratios) it does seem that at *extremes* you can justify tilts away.
For instance have a look at the S&P 500 equal-weighted versus market cap weight over the next decade from the Dotcom bust. The outperformance is striking.
We seem to be at a similar juncture today in terms of US stock market concentration, a ‘story’ making all the running, and high CAPE ratio (for what it’s worth).
But of course things do change. Nobody wants to write “it’s different this time” but if it will ever be different in our lifetimes then ‘continual progress towards off-the-shelf human intelligence’ would surely be it. (Not saying we’re getting there but that’s the narrative).
So it’s difficult. I suspect if I was a passivista I’d split things 50/50 or similar as it’s very hard to call. But then I would have said exactly the same thing a year ago, to my cost I suspect.
I too have got a bit nervous about the Mag 7 dominance. And switched a chunk from HSBC FTSE All-World to XUSE and AVSG. Don’t want to be rich, just avoid another US lost decade.
@Longshore Drift.
Thank you for an excellent article. It reflects many of the concerns and options I have been pondering. Just pulled the trigger on shifting part of the portfolio from HSBC FTSE All World to VHYG.
My reasoning is unease and a prickling of risk-aversion thumbs rather than a fully coherent argument. The ‘AI is the next industrial revolution’ idea leaves me cold. I have used and do use AI, but it feels like we are heading for the top of the Gartner hype cycle, and at the very least, I see a significant shakeout. A lot of big companies are going to call this wrong and get burned.
I don’t think the damage to the top ten holdings in my FTSE All World index will be terminal. Several of them make chips, which we will continue to need in abundance, and for most of them, AI is not the only play in hand. I am also not worried about significant NA holdings. It is a big market. It is just that I would like to hold a bigger spread of the large successful companies that do other stuff (and whose names I recognise and products I understand). VHYG does that for me.
@ermine.
I take your point, but I am not sure purely passive investing actually exists, because there is not one passive strategy. Equal weight vs Market cap indices. Which index you like/follow. Portfolio strategy and balance. Which model portfolio you lean towards. All are calls on how you think the market is going to behave over your time horizon.
As one of my bosses used to say about R&D investment, “We are not picking winners, we are picking the races we choose to enter”. So I am shifting the balance a bit whilst staying pretty damned passive (low effort, sleep and night, no blow-out but no disasters).
We will see how it turns out; especially when SpaceX enters the indices.
May all our passive sins be venial and our penances light!
what is the definition of “passive investing”
I switched from VWRL to an equivalent mix of VUAG, VEUA, V3PB and VFEG, i.e. S&P 500, Europe, Asia Pacific, EM.
Mainly because of the different approach that S&P are taking to the mega IPOs, but it also allows me to cap the VUAG holding later on if I’d like to, or direct new contributions to the other regions.
@ old_eyes, agreed on ‘passive’, and there’s a lot to be said for the alternative ‘index fund investor’ term (can’t immediately remember whether I saw that debate here or elsewhere).
@LCD.
Yes, index investing is less immediate, but more accurate. Mirrors the debate in sustainability circles where people are encouraging the use of ‘resilience’ rather than ‘sustainability’. It makes the immediate point that we are trying to stop stuff going wrong that will affect you and yours right now.
@old_eyes — Yes, I think VHYG can answer many of those questions. The point about picking races to run in rather than winners captures it very well. To borrow crudely from philospher Daniel Dennett and his analogy that describes a compatiblist view of free will: We can’t choose the weather, but we can choose the ship we sail in. And as index investors, we shouldn’t then lean too hard on the wheel…