Catherine Yoshimoto
- Global equity imbalance: The US now represents nearly two-thirds of the FTSE All-World Index, reducing global diversification.
- FTSE target diversification: Using algorithmic reweighting can rebalance indices and lower concentration without high tracking error.
- Alternative exposures: Focusing on small-cap or market cap completion indexes offers investors broader market participation and valuation advantages.
The continuing rise of US equities and US companies’ dominance in global equity indices pose a challenge for allocators seeking to maintain a diversified portfolio. Here are three different ways of addressing the diversification challenge within a global equity portfolio.
1. Take out the US completely
In September 1987, the US stock market represented 37% of our flagship, 23-country global equity index (then called the FT-Actuaries World index). This meant that the US had roughly the same index weight as Japan.
By September 2025, the FTSE All-World index had expanded its membership to 48 countries, but the US stock market had reached nearly two-thirds of the index by weight, now over ten times more than Japan. Meanwhile, none of the other 46 equity markets had more than a 5% weight in the index.
FT-Actuaries World index Country Weights September 30 1987
FTSE All-World index country weights (%) September 30 2025
A simple, rule-of-thumb way to achieve greater diversification in a global equity portfolio is to separate non-US and US equities and then use different indices (or index families) to represent the two categories.
For example, within a broader portfolio, one could use the FTSE All-World ex-US index to represent non-US shares and the FTSE USA or Russell US indexes to represent the US equity market.
For illustration, here are the country weights of the FTSE All-World ex-US index (i.e., the FTSE All-World with the US removed) at the end of September 2025. Nine non-US markets (Canada, China, France, Germany, India, Japan, Switzerland, Taiwan and the UK) had an index weight of over 5%.
FTSE All-World ex-US index country weights (%) September 30 2025
2. Use the FTSE Target Diversification algorithm
As at September 2025, the FTSE All-World index was not just concentrated in terms of country weightings, it was concentrated at the stock level too.
Although the index has 4254 constituents, 24% of the index by weight was represented by the top ten holdings. All but one of these were US stocks with a heavy focus on technology and the ongoing artificial intelligence (AI) boom—and the other was Taiwan’s TSMC, the leading manufacturer of semiconductors.
Top 10 Constituents
| Constituent | Country/Market | ICB Sector | Net MCap (USDm) | Wgt % |
|---|---|---|---|---|
| Nvidia | USA | Technology Hardware and Equipment | 4,358,085 | 4.76 |
| Microsoft Corp | USA | Software and Computer Services | 3,833,721 | 4.19 |
| Apple Inc. | USA | Technology Hardware and Equipment | 3,704,826 | 4.05 |
| Amazon.Com | USA | Retailers | 2,102,072 | 2.30 |
| Meta Platform Inc. | USA | Software and Computer Services | 1,600,247 | 1.75 |
| Broadcom | USA | Technology Hardware and Equipment | 1,520,600 | 1.66 |
| Alphabet Class A | USA | Software and Computer Services | 1,410,286 | 1.54 |
| Tesla | USA | Automobiles and Parts | 1,248,436 | 1.36 |
| Alphabet Class C | USA | Software and Computer Services | 1,150,441 | 1.26 |
| Taiwan Semiconductor Manufacturing | Taiwan | Technology Hardware and Equipment | 1,039,574 | 1.14 |
| Totals | 21,968,290 | 24.00 |
Source: FTSE Russell. FTSE All-World index data as at 30/9/25. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Beyond the top ten holdings, we can use the FTSE Russell Diversification Factor to measure the FTSE All-World index’s overall diversification.
This is a simple, intuitive metric that expresses how diversified an index really is. For example, a Diversification Factor of 200 means the index is as diversified as an index holding 200 equally weighted stocks. The higher the Diversification Factor, the more diversified the index is—irrespective of what’s in the benchmark.
Our calculations show that the Diversification Factor of the FTSE All-World has fallen from around 500 at the beginning of the last decade to just over 100 now. This indicates that the performance of the index is being driven by an ever-smaller number of stocks.
We’re all familiar with this equity market concentration story by now—but the change in the Diversification Factor since 2007 shows it very clearly.
FTSE All-World Diversification Factor
The next step in addressing index concentration using the Target Diversification approach is to specify the desired Diversification Factor—say, 200, 500 or 1000—and then to run an algorithm to reset the index weights to achieve that factor.
As an index construction approach, Target Diversification preserves more of the market-cap structure of the starting index, while still improving diversification, reducing tracking error and constraining the turnover-related costs that are inevitable with a shift away from the cap-weighted index.
Target Diversification also provides greater capacity, lower turnover and lower tracking error (by reference to the cap-weighted starting portfolio) than equal weighting.
3. Try Small Caps or Market Cap Completion Indexes
Let’s say you’ve separated non-US from US equities in your portfolio (as in step one, above) and want to take a closer look at which index you use to represent the US equity market.
One possibility is to shift from the big tech stocks that currently dominate the US equity market and to focus on the smaller company sector. There’s currently renewed interest in FTSE Russell’s flagship US small stock index, the Russell 2000, which combines a more domestic focus with more modest valuations than US large-cap stocks.
Another option is given by the Russell US Market Cap Completion Indexes (shown in darker blue in the chart below). The Market Cap Completion Indexes allow index users to segment the US equity market into smaller building blocks, providing extra flexibility for allocators.
For example, the Russell Top 50 Mega Cap index plus the Russell 1000 ex Top 50 Mega Cap index roll up seamlessly to make the Russell 1000.
Alternatively, the Russell 1000 could be segmented into the Russell Magnificent 7 and the Russell 1000 ex Magnificent 7 indexes.
The Russell US index family therefore provides a variety of size segments to suit different investor requirements, while continuing to follow the standard, market capitalisation-weighted construction approach.
A continuing challenge
The rise and rise of US stocks has been the equity market story of the 2020s. Whether or not it continues, forward-thinking investors will be preparing for a change in market conditions. These three index-based approaches to achieving additional diversification in global equities could serve as a starting point for the discussion at your next equity committee meeting.
Read more about
Disclaimer
© 2025 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.
