Diversification offered by traditional index tracker funds is typically much higher than this. The struggles of the past year, however, serve as a reminder that even funds that are meant to be deliberately dispersed can still be overly exposed to a small number of large, popular companies and suffer when public sentiment turns against them.
Read more: Index fund investors may be taking on hidden risk
Trackers of the widely followed MSCI World index also appear vulnerable, given its substantial weighting to the US and the recently weakened tech giants. The so-called “Fanmag” stocks, which include Facebook owner Meta, Amazon, Netflix, Microsoft, Apple, and Google owner Alphabet, recently made up more than a fifth of the popular iShares Core S&P 500 UCITS ETF.
Funds created to reduce this concentration risk are currently experiencing a resurgence, according to the Times.
ETFs that rely less on tech giants and invest roughly equally in each of the shares that make up the S&P 500 have gained popularity. Additionally, emerging market ETFs that do not include the massive presence of Chinese stocks in regional indexes exist. Although such funds have so far performed well, they also carry some specific risks.
