Wary of Concentration Risk? Time to Think Active | ETF Trends

Concentration risk remains one of investors’ key concerns about the U.S. stock market right now. With just 10 or so firms driving the vast majority of the S&P 500’s gains, the index may be becoming unbalanced. As a result, investors are eyeing alternatives, which has boosted active ETF adoption in 2023. New analysis from Strategas Research Partners highlights this connection and underlines the success actives have had in 2023 so far.

Per new analysis by Todd Sohn, director of Strategas Securities’ Technical Analysis team, active equity ETFs have accounted for 32% of year-to-date flows. That’s even more remarkable considering that active equity ETFs still only account for less than 1% of total AUM invested in ETFs.

Those flows may be a response to the significant role the top five weights in the S&P 500 are playing right now, Sohn noted. The top five stocks account for a record amount of weight in the index right now:

S&P 500 concentration risk

The weights of the top 5 stocks in the S%P 500 have never been this high before.

Source: Strategas, Todd Sohn

See more: “Active Quality ETF TCAF Crosses Another AUM Threshold

Avoiding Concentration Risk in Active Strategies

Active ETFs can help manage concentration risk by empowering managers to adapt more quickly than indexed strategies can.

Passive indexed strategies often require investment committees to meet before making portfolio position changes. Active managers, however, can respond to headline risk without the same bureaucracy. Managers can hone an ETF’s holdings to address concentration risk more nimbly than via screens or overall allocations.

Active investing doesn’t just offer investors tools for avoiding concentration risk and other potential issues. Active strategies have also proved their performance chops so far this year, and in some cases out-drew flows over passives in the first half of this year.

Per Strategas’ analysis, active mutual funds have lost ground over the last few years. It now appears that active ETFs may be picking up some of that slack. When looking at concentration risk, active strategies may be one strong option for investors to consider in the weeks ahead.

For more news, information, and strategy, visit the Active ETF Channel.