Market-cap weighting decides your concentration for you

Everything here earned its place by changing an outcome. Nothing about market capitalisation weighting is included to round the number up.

What size weighting does

A market-cap weighted fund holds each company in proportion to its market value, so the largest companies occupy the largest positions. As a company grows, its weight in the index rises automatically without the fund having to buy a single additional share. That self-adjusting property is the reason size-weighted funds trade so little and consequently cost so little to operate.

It also means the fund never has to form a judgement, which removes exactly the activity that active management charges for. The mechanical consequence is that weights follow prices, and prices follow whatever the market currently believes about each business.

Concentration arrives without a decision

When a small number of companies grow far faster than everything else, they come to dominate the index without anybody choosing that outcome. A very broad index can end up with a large share of its total value in a handful of names within one sector. Investors who bought the fund specifically for diversification frequently do not notice this until they read the list of top holdings.

Put simply, the concentration is not a malfunction; it is the weighting rule faithfully reporting what has already happened to prices. Whether you are comfortable holding it is a separate question from whether the fund is doing its stated job correctly.

The argument in its favour

Size weighting represents the aggregate position of all investors, which makes it the only weighting scheme everybody could hold at once. Any alternative weighting requires somebody else to hold the opposite position, and arriving at that position has to be paid for through trading. Because weights adjust themselves, a size-weighted fund incurs trading costs mainly at index reviews rather than continuously through the year.

Comparisons of weighting schemes over long periods have produced mixed and strongly period-dependent results, which argues for humility rather than confidence. The honest summary is that size weighting is cheap, mechanical and defensible, not that it has been shown to be optimal.

What the alternatives actually do

Equal weighting holds the same amount in every constituent, which tilts the portfolio towards smaller companies and requires continual rebalancing to maintain. Fundamental weighting uses accounting measures such as revenue or book value, deliberately breaking the link between a share price and its weight. Both approaches involve higher turnover than size weighting, and turnover carries a cost that surfaces in charges and in tracking.

They also produce stretches of underperformance against the size-weighted index long enough to exhaust most people's patience with them. The choice is between two different sets of imperfections rather than between a flawed default and an actual solution.

Checking your own concentration

The fact sheet lists the ten largest holdings and their combined percentage, and that single figure tells you most of what you need. Add the country and sector breakdowns, which frequently reveal that a fund described as global is dominated by one market. Holding several funds does not fix this if all of them track size-weighted indices sharing the same largest constituents.

For most people, overlap between supposedly different funds is one of the most common reasons a portfolio is less diversified than its owner believes. Check it once a year at the review, because the concentration changes without any action on your part at all.

What to do with the information

Discovering high concentration is not automatically a reason to change anything, since every alternative carries its own tilt and its own costs. It is a reason to know what you own, so that a fall concentrated in those particular names does not arrive as a shock.

Adding a fund purely to dilute concentration adds cost and complexity, and it deserves to be a considered decision rather than a reaction. If the concentration genuinely exceeds what you could hold through a bad stretch, that is an allocation question rather than a fund question. The worst version is discovering the concentration during the fall rather than during a quiet afternoon at the annual review.

Everything above, in order of what to do first

1. What size weighting does. A market-cap weighted fund holds each company in proportion to its market value, so the largest companies occupy the largest positions.
2. Concentration arrives without a decision. When a small number of companies grow far faster than everything else, they come to dominate the index without anybody choosing that outcome.
3. The argument in its favour. Size weighting represents the aggregate position of all investors, which makes it the only weighting scheme everybody could hold at once.
4. What the alternatives actually do. Equal weighting holds the same amount in every constituent, which tilts the portfolio towards smaller companies and requires continual rebalancing to maintain.
5. Checking your own concentration. The fact sheet lists the ten largest holdings and their combined percentage, and that single figure tells you most of what you need.
6. What to do with the information. Discovering high concentration is not automatically a reason to change anything, since every alternative carries its own tilt and its own costs.

The takeaway

The weighting rule is the real portfolio decision. Read the top ten holdings before deciding you are diversified.

Pick the one that costs you least, and let the rest wait.