Trade your view: Is that too much US in your ETF?

If you have invested in US equities over the past decade, you have chosen the right market. American stocks returned 12.4% per annum by the end of March 2025, compared to the rest of the world which, excluding the US, returned only 6%.

Shares of US companies have also contributed significantly to the performance of the MSCI all country world index (ACWI), mainly because they account for about two-thirds of the gauge’s market capitalisation. The index covers more than 2,800 stocks across 23 developed and 24 emerging markets, making it one of the most comprehensive indices available.

This relative performance has meant that the US has run ahead of other markets valuation-wise, trading at a significant premium of 45%-60% to other developed markets as measured by p:e ratios, among other metrics.

My reading of the sentiment coming into the new year presented three scenarios for the US market:

1. The possible continuation of “American exceptionalism”, characterised by the continued dominance of corporates from the world’s biggest economy, particularly tech giants listed on Wall Street.
2. The potential broadening of interest in US securities into other parts of the market (for example, the Dow and mid- and small-cap indices).
3. The risk of fragility of the US market to a shock, given stretched valuations.

The recent market volatility was brought about by uncertainty over President Donald Trump’s policies, only to be compounded by the “Liberation Day” tariff announcements, which certainly caused a market shock, weakening most global markets, including the US.

One hopes that volatility will moderate, albeit that much still needs to play out in the new trade paradigm. Other disruptions, such as the arrival of DeepSeek AI, have also provided cause for reflection. The point is that markets can be unpredictable, and the ability to achieve diversification and different forms of return is important.   

Many local investors now utilise local JSE-listed exchange-traded funds (ETFs) to express their global equity view. While choice has increased among available ETFs, there has been a predictable clustering of offerings around the MSCI world index, the MSCI emerging markets index and the ACWI.

These core allocations have dominated assets under management tables, raising more than R40bn. Meanwhile, the US-centric indices have garnered significant interest from issuers and product providers alike.

There are five S&P 500 products with collective assets of nearly R20bn. Additionally, technology, through various indices – including the tech-heavy Nasdaq and the S&P 500 information technology index – has also seen good flows and, of course, performance over the past few years.

The tracking of assets under management towards US market performance is plain to see, the past few weeks notwithstanding. The upshot is that most ETF investors have a heavy weighting towards the US, perhaps without even knowing it.

Looking for balance

There are further concentration risks within the index as the market caps of the top 10 shares (mostly incorporating the so-called “Magnificent Seven” of Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta and Tesla) have drifted up in terms of their respective weight in the index too. The top 10 stocks of the S&P 500 are roughly a third of the index, which is significantly higher than its historical average of closer to 25%.  

Outside of the first scenario for US equities, which I painted earlier, and given the heightened volatility experienced in recent weeks, investors may want to seek more diversification outside of the default country weightings within the ACWI.

One shouldn’t be perturbed by the lack of products covering these markets. Currently, there are only a handful of locally listed ETFs tracking developed markets outside of the US, such as Europe, the UK and Japan, where Sygnia is the primary issuer. Some listed note options are also available from UBS.

It may be an opportune time to seek a more balanced country exposure, especially as global trade enters uncharted territory.

The other aspect missing from a simple market-cap-weighted global (or US) product is exposure to more defensive or valuation-driven parts of the market. Technology, as pointed out earlier, dominates the US index, yet at a time of market distress, one is often better placed in defensive sectors such as utilities or consumer staples.

Assessing the JSE ETF product set through a factor or “investment style” lens, we see that most factors, such as minimum volatility and high dividend yield, as defined by MSCI, have underperformed the general market over the past five to 10 years. Only quality and growth have eked out marginal gains over the past five. This has weakened interest in these products and strategies relative to a simple Bogle approach of owning the whole market.  

However, in the very short term, particularly in the past quarter’s market volatility and drawdown events, a number of factors have shown strong relative outperformance.

The case for value

In many of the recent global presentations I attended, managers were careful to highlight the case for value, especially given the relative underperformance. The performance of low volatility, or low beta, during the global financial crisis was a key example put forward by index providers, demonstrating the merits of factors some years ago. This could mean that it is time to shine for factor portfolios that are more valuation  and volatility conscious.

At first glance, these sorts of style- or factor-based portfolios are not readily available via ETFs on the JSE. However, with the introduction of many new actively managed products, this is changing. Among the index-based products, some decent proxies for value, low volatility or quality-like approaches exist.

Here are two opportunities for a global hedge at a sector level that, in my view, deserve a closer look:

1. 10X S&P Global Dividend Aristocrats ETF. This ETF exposes you to a portfolio of quality global companies with a solid track record of paying and growing their dividends. It is a global index that covers Europe, Canada, Pan Asia and the US. Industrial, consumer staples, financials and health care make up more than 63% of the portfolio, providing a more sober offset to the racy tech sectors.
2. The Satrix Global Infrastructure ETF provides exposure to worldwide listed companies involved in infrastructure activities, which involve the development, ownership, operation and management of structures or networks used for the processing or moving of goods, services, information/data, people, energy and the like from one location to another. The upshot is a 50% allocation to defensive utilities and a further 21% allocation to industrial shares.  

While both have shown strong defensive characteristics in the recent market rout, they are not altogether immune to a market sell-off.

Given the topsy-turvy and largely negative effects of the Trump presidency so far, diversification, both regionally and through factor or investment-style allocation, could be your greatest friend as we navigate the next few years in global markets.

Accordingly, investors can seek exposure outside of the high volatility products that are inherently weighted towards the US large caps and explore products focused on other developed markets or where a defensive hedge may prove useful while still staying in the markets.

Gareth Stobie is the director of strategy and corporate development at ETFSA. With over 22 years of experience in financial services, Gareth has worked in both investment banking and asset management. In 2015, he founded CoreShares which, before its acquisition by 10X Investments, became one of the innovative leaders in the passive investment market.