The FTSE Developed Target Diversification 400 Index

The FTSE Developed Target Diversification 400 Index addresses a fundamental problem: Concentration risk.

Since 2007, the concentration level of the top 10 holdings on the FTSE Developed Index increased dramatically, expanding from 9% to 26%. The US weight increased by 25.3 percentage points to 70.8%, and the technology weight nearly quadrupled. 

Key takeaways:

• The FTSE Developed Target Diversification 400 Index leverages our proprietary Target Diversification methodology to deliver a more balanced exposure while maintaining the essential characteristics of market representation
• At its core, the FTSE Developed Target Diversification 400 Index employs two key innovations:
  • The FTSE Russell Diversification Factor, which quantifies diversification in intuitive terms
  • The Target Diversification Algorithm, which applies a non-linear transformation to index weights to achieve precise diversification targets

Points of differentiation:

• Our comprehensive analysis from 2007 to April 2025, demonstrates compelling performance characteristics. The FTSE Developed Target Diversification 400 Index has delivered comparable returns to its parent cap-weighted index with slightly lower volatility, while achieving a considerable improvement in diversification. Crucially, it maintained minimal tracking error, making it suitable for benchmark-aware mandates.
• Our analysis showed that the Target Diversification strategy, if used from 2007 to 2025, would also have produced industry and country allocations that more closely reflected economic fundamentals during the period. The FTSE Developed Target Diversification 400 Index has lower active share, relative to long-term historical weights, and GDP weightings.
• Beyond historical performance, the index is potentially well-positioned for future outperformance if markets exhibit mean reversion. With a more moderate P/E ratio compared to the cap-weighted index, the FTSE Developed Target Diversification 400 Index systematically reduces exposure to potentially overvalued segments while increasing allocations to historically underweighted regions. This better addresses the proposition put forth by some institutional investors, to rebalance portfolios away from US equities toward European and Japanese markets, and achieves the rebalancing systematically without requiring market timing decisions.

What does our research mean for investors?

For institutional investors seeking to address today's concentration challenges while maintaining broad market exposure, the FTSE Developed Target Diversification 400 Index offers a tractable, rules-based, and efficient solution that resolves the longstanding tension between diversification and market representation.

A distinctive attribute of the methodology is its calibration flexibility. The framework allows investors to select specific diversification targets along a continuum, from minimal adjustments with tracking error below 1.1%, to moderate enhancements balancing diversification and tracking error, to achieve a more extensive diversification.