One of the latest studies by Vanguard examines the risk of overconcentration in high-cap U.S. stocks and whether, as a result, ETF investors are adjusting the global allocation of their portfolios.
The report reveals that while the market shows a marked tilt toward selected Magnificent Seven companies, Vanguard indicates that advisors may have already adjusted their clients’ portfolios accordingly.
The firm conducted a survey of 1,747 clients, which shows that advisors are already tilting their portfolios toward small- and mid-cap stocks, moving away from large- and mega-cap growth stocks that have experienced a strong rally.
The median among respondents has been overweighting mid and small caps by approximately 10 percentage points above benchmark allocations, which are around 25%.
While advisors appear to be reducing their exposure to large-cap stocks, another critical factor they may be overlooking is the bias toward domestic markets.
Research by Vanguard shows that the median client portfolio has a 75% weighting in U.S. stocks, well above the 63% allocated to American stocks in global benchmark indexes.
That represents an overweight of 12 percentage points, and more than three-quarters of client portfolios show some level of home bias.
Market capitalization indexes risk a greater allocation to a handful of names, which can make exposure seem excessive. Such indexes are arguably the best strategy for holding a representative slice of the broader macroeconomy, but moving away from the highest-returning U.S. companies addresses only one part of a portfolio’s overconcentration source.
Adding more international equities can make portfolios more diversified—a benefit that, according to the study, could prove profitable “if the current valuation gap between U.S. and international stocks normalizes over the long term.”
