Key Takeaways
- A global equity fund is often already a concentrated bet on US large-cap growth stocks.
- Concentration risk is also a defining feature of many European equity markets.
- In some European markets like the Netherlands, a single stock can make up to 50% of a country index.
Diversification is one of the most effective ways to manage risk in a portfolio. By spreading investments across regions, sectors, and asset classes, investors can reduce the impact of any single market or company on overall returns—something that can prove especially valuable during times of market volatility.
But diversification is not defined by the number of assets in a portfolio or the labels attached to them. It depends on the underlying stock exposures those investments provide.
This means that many investors who appear well diversified across equity markets may still be heavily exposed to the same underlying drivers of return.
Your Global Equity Fund Is Probably Not as Global as You Think
Global equity funds are often seen as a straightforward way to achieve diversification. However, the structure of global indexes means that they are heavily weighted toward the US, which typically represents around 60–70% of the benchmark.
Within that, a relatively small group of large technology companies accounts for a significant share of market capitalization and index performance. In the Morningstar Global Markets Index, the US market represents 60.9% of the portfolio, with a total exposure of 25.6% to the technology sector.
This means that a “global” equity fund is often already a concentrated bet on US large-cap growth stocks. Adding a dedicated US equity fund, or a technology-focused strategy, can significantly increase that exposure, rather than improve portfolio diversification.
European Stock Markets Also Harbor Concentration Risks
Reducing US exposure by allocating more to Europe may seem like a logical response to investors based in Europe. But concentration risk is not unique to global indexes; it is also a defining feature of many European equity markets. In nine of the 20 largest markets in the Morningstar Europe Index, a single company accounts for more than 20% of the index.
The Netherlands provides one of the more extreme examples. Semiconductor equipment company ASML ASML accounts for 48% of the Morningstar Netherlands Index, meaning nearly half the market’s performance is tied to a single company.
A similar dynamic exists across several markets. In Denmark, pharmaceutical company Novo Nordisk NOVO B represents close to 30% of the index, while in Belgium, brewer Anheuser-Busch InBev ABI accounts for roughly 24%. In both cases, the performance of a single company can have a meaningful impact on overall market returns.
Even in markets where no single company dominates to the same extent, concentration can still be significant. In the Morningstar Switzerland Index, Roche ROP, Novartis NOVN and Nestlé NESN together account for around 40% of the index, creating a heavy tilt toward healthcare and consumer staples.
Sector concentration is another risk factor, especially when investing in ETFs tracking country-level benchmarks. Southern European markets such as Spain and Italy are heavily tilted toward financials, with banks representing a large portion of index weight. In contrast, markets like Denmark and Switzerland are dominated by healthcare, while Norway has a clear energy bias through companies like Equinor EQNR.
Why Concentration Risk Is Smaller in Actively Managed Funds
Taken together, this highlights that concentration is often embedded in the structure of equity markets themselves. How much of that concentration ends up in your portfolio depends not just on where you invest, but on how your funds are constructed.
Actively managed funds in Europe are typically governed by the UCITS framework, which imposes diversification rules designed to limit concentration. Under the “5/10/40 rule”, a fund cannot invest more than 10% in a single issuer, and the combined weight of positions exceeding 5% cannot make up more than 40% of the portfolio.
This means that actively managed equity funds are constrained from building highly concentrated portfolios and typically hold a broad set of positions. While this reduces single-stock risk, it can also limit the impact of strong-performing holdings, as managers are required to trim positions as they grow.
Index funds and ETFs, however, can operate under a different dynamic. While most are also structured under the UCITS framework, they are designed to track an underlying index and can therefore be granted exemptions from standard diversification rules. This allows higher exposure to individual companies, often up to 20%, and in some cases as much as 35% for particularly concentrated indexes.
As a result, the level of diversification in an index fund is largely determined by the structure of the index itself. In markets where a small number of companies dominate, this can translate into significant single-stock or sector exposure at the fund level. Reviewing top positions, sector weights, and geographic exposure is your best bet to get a clearer picture of where a portfolio’s risks are concentrated.
