ETF: how to diversify your wallet to maximize your performance

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Behind their apparent diversification, the index funds accentuate the weight of the stock market leaders. Decryption of a phenomenon that shapes market dynamics and questions long -term investment strategies, by Catherine Baudeneau, member of the Altaprofits management committee.

THE ETF today are an essential investment medium. 2024 was a record year With 247 billion euros in flows, exceeding the previous record of 159 billion euros in 2021 according to Morningstar. They seduce with their reduced costs, but also by their ease. Indeed, index ETFs consist in replying identically the performance of a reference index, such as the S&P 500, the MSCI World or the CAC 40. The underlying idea is that the markets are sufficiently efficient, making any attempt at a manager to beat the long-term market useless. Thus, the error tracking (the performance gap between the fund and the index) is often very low: it is for example 0.0 % over three years for the MSCI World*.

However, despite this apparent simplicity and the “basket” effect sought, the diversification offered by certain ETFs can prove to be misleading. While the MSCI World is supposed to represent 85% of the world market capitalization, it is 70% dominated by American values, which in fact exposes the investor overvoltaged to the US market. Worse, the first 7 values ​​(Apple, Microsoft, Nvidia, etc.) weigh for 20% of the index, while Nestlé, the first non -American value, does not exceed 0.058%. Same observation for the S&P 500: the famous “magnificent 7” capture almost 30% of the index. The result? A major imbalance that leaves little room for more modest actors.

The ETF snowball effect: ever more dominant leaders

Thus, today, each new investment in an ETF benefits companies with high capitalization. This is the mode of very functioning of the ETF – The replication of index weighted by the capitalization – which leads to this effect snowball: the more a company weighs in the index, the more it will receive capital … allowing it to further establish its stock market supremacy. A mechanics accentuated by the ESG (Environment, Social and Governance) strategies: the companies already very capitalized, having the means to have robust ESG policies, mainly emerge from these filters, to the detriment of more modest companies.

Conversely, this mechanism negatively affects small capitalizations and emerging markets. Small Caps, traditionally more volatile – but also historically long -term outperformance sources – are struggling to attract index capital in recent years. “Vampirized” by the largest capitalizations, their place is gradually reduced in index portfolios. Small transmitters must now deliver exceptional results to hope to increase their weight in the indices. And the ETF dedicated to Small Caps, too small in flow, do not allow to compensate for this over -known overlying effect.

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How to rebalance your wallet?

A first level of response is found in the diversity of ETF existing on the market: ETF Equionérés make it possible to erase the overlying effect, the active ETFs integrate an active management dose on a passive management basis, with the aim of outperforming the reference index; Finally, the Sectoral and thematic ETFwhether they are passive, equals or assets, will allow targeted investments in a specific sector of the economy or on long -term trends … So many possibilities to rebalance its portfolio.

But real diversification also involves diversification in terms of management methods. If ETFs are based on the idea that the markets are efficient in the long term, active management allows you to adapt to eventful market conditions, and to limit losses – or even create performance – on lower markets, or to take advantage of short -term opportunities. Thus, combining several management methods in a portfolio is an often winning strategy.

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* According to the 2024 MSCI report