Index concentration is a portfolio decision you did not make

The index traded at 764.38 this morning, -0.32% on the session. Index investing is sold as the decision not to make decisions. That was more true a decade ago than it is now.

What you own without choosing it

A cap-weighted index allocates by size, which means it allocates most heavily to whatever has already risen most. That is a momentum strategy with the label removed, and it works well right up until it does not.

The consequence is that a saver who chose a broad index for safety may hold a portfolio more concentrated than one they would ever have built deliberately.

What I measure

• Weight of the top ten as a share of the index, and how fast it is moving
• Effective number of holdings, which is a better summary than the count
• Correlation among the largest weights, because concentration only bites if the big positions move together
• The gap to equal weight, which is the same information as a single line

That third one is what turns a statistic into a risk. Ten large positions that move independently is not concentration in any meaningful sense. Ten that share a driver is one position wearing ten names.

Why this is not a trade

I have no view on whether concentration unwinds this year, and anyone who says they do is guessing. What it changes is sizing: if the index is a bigger single bet than it looks, then everything held alongside it needs to be assessed against that, not against the index label.

Diversification is a property of the holdings, not of the word on the fund factsheet.

What I would watch for

The correlation measure, more than the weight. Weight can climb for years without consequence. Correlation is what turns it into a problem, and it moves faster.