Market Cap ETFs May Not Be the Answer

By J.P. Morgan Asset Management via

Market cap-weighted ETFs have dominated the investment landscape over the last 20 years. But in today’s unpredictable market environment, investors are increasingly turning away from traditional passively-managed ETFs and toward a more diversified approach in the quest for better beta.

With the global economy warming up, but political uncertainty going nowhere fast, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. In the search for diversification and cheaper access to pure market beta, many investors turn to passive index ETFs, which track a market cap-weighted index.

A market cap-weighted index is a stock market index whose individual components are weighted according to the total market value of the shares. As share prices go up, securities may become overvalued and their market capitalization—the price multiplied by the number of shares outstanding—increases. A market cap-weighted index simply increases weights to securities as prices rise, without regard for valuations.

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