Halo

If you are purely buy-and-hold and believe in the index providers then I think just let the markets move on its own.

Many decades ago in the 1980s during Pax Japonica, Japanese stocks account for 44% of MSCI World Index as well. The proportion has since declined to just single digit %, but MSCI World Index still exists to this day.

So, the index will rebalance itself over time. If you attempt to diversify on your own you might end up underperforming the index in the long run.

If you are are really concerned about concentration pick a global equity ETF which track MSCI World or FTSE All-World Index rather than purely S&P 500 (e.g., heavier weights on VWRA rather than CSPX). That way your returns are correlated to S&P 500 or major US indices but not moving entirely the same way as just a purely US ETF.

It's important to recognize that mid and small caps are less liquid than large cap stocks (-> higher trading fees -> higher ETF expense ratio) and the lack of cash in most of those companies' balance sheet make them underperform in a high interest rate world. They also tend to be more volatile than large cap counters.

Lastly, try not to touch thematic investment themes like "value", "growth" etc... these ETFs don't outperform the main index in the long run... They are created by "smart" fund managers to harvest your "fees and commissions"... You see a lot of AI-themed ETFs recently for a reason... and not too long ago, we have ESG-themed ETFs...go further some more years, we have... clean energy... climate change...

One theme may perform well in a year but falters quickly in the coming years...(clean energy did very badly in 2022 when interest rates went up and oil prices spiked) But you are sure it's your fund managers who walk home with your money. Try to google "thematic investing/investment underperform" and you will see why. If they tell you you can broaden your scope of "themes", then you might as well ask yourself why not just buy the whole market, aka. VWRA/URTH etc.?

Just my 2 cents. Hope that helps.

References:

https://archive.ph/J2NWY

https://archive.ph/FXsIk

https://www.wsj.com/articles/investors-love...share_permalink

https://en.wikipedia.org/wiki/MSCI_World

Differentiating companies by market cap is a lot easier than such thematic factors as value/growth etc. Market cap is straightforward, more than bla bla bla hundred of billions = large cap, between bla bla bla tens and bla bla bla hundred of billions = mid cap and smaller than bla bla bla ten billions = small caps. Then you have micro-caps and the mega caps worth trillions in USD.

Value/growth has no exact definition per se, and is subject to accounting manipulations if you use such measures as Price/Book value. But market cap = price per share (directly observable) * no. of outstanding shares (again directly measurable). So, no ambiguity here.

Thematic factors are actually invented by index providers and fund managers to make more money... (don't say I tell you this. ) If MSCI and FTSE just sell you the lists of FTSE All-cap and MSCi World Index constituents they will go bankrupt fairly quickly So as the fund managers. But then their creative marketing departments come up with new "business ideas" to "sell more value to their clients". So they claim they walked the extra mile and studied the various factor models and they think they understand the various thematic factors at play. In reality, as researches have shown, no themes or factors outlast the major index in the long run.

Well, truly passive ETFs will have extremely low expense ratio. VOO achieved 0.03% per year and that is full replication. For large global indices, the ETFs tend to do representative sampling of a portion of the index rather than physical replication of all the thousands of stocks in the index. They claim this will help cut trading costs as some markets are less liquid than others. Even with representative sampling, the expense ratio of URTH is around 0.24% p.a. There will be some semi-active management by the fund managers for the case of partial/representative sampling because the fund managers need to decide what stocks to sample, out of the entire thousand of stocks in the indices. You can assume that for representative sampling of global liquid stock ETFs, expense ratio would be around 0.3% p.a.

As for whether the ETFs' constituents will be handpicked by fund managers, you will have to check the prospectus of the ETFs. They will state clearly whether the ETFs seek to fully replicate, representatively sample or pick stocks at the fund manager's discretion. VOO is fully-sampled, tracking S&P 500, URTH is representatively-sampled (semi-actively managed), tracking the MSCI World Index while ARKK is actively-managed, stock purchase/selling are decided by Cathie Wood without consultation with any index providers like MSCI or FTSE.

Mid-caps and small-caps are less liquid than large/mega caps so a higher expense ratio is normal. Can't advise on what to buy. That's your money haha. If you want to wait on the sidelines there's BIL ETF paying you 5% p.a. (nearly) risk-free. In recent years, large and mega caps are doing better than mid-caps because of the large flow towards passive market-cap weighted stock indices like S&P 500/Nasdaq 100, which benefit more towards those big companies accounting for a large portion of the market index. "Big begets bigger" And of course flushed with cash and in a weak antitrust environment, mega caps "knows no enemy" and expand wildly with M&A while mid and small caps are stuck at square one.

Another thing about concentration: https://finance.yahoo.com/news/big-reshuffl...-174907744.html



Indeed, as Gwynbleidd said, the index providers also have to bow to ETF concentration limits requirements, so passively tracking indices may not be the that passive after all. Tech sectors will probably have this issue due to high concentrations in market cap among the few, but S&P 500 is still large enough to prevent the diversification rules from being enforced for now...