Legal & General is to launch an equally weighted S&P 500 tracker to address growing investor concerns about over-concentration risk in the main US equity index.
By tracking the S&P 500 Equal Weight index, the Legal & General S&P 500 US Equal Weight Index fund improves diversification by providing equal weight exposure to US large-cap stocks, rather than the market-cap weighted approach traditionally used. It is aimed at UK wholesale investors.
The fund seeks to address the risk of overexposure to the so-called Magnificent Seven – the largest US companies by market cap: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. These stocks now account for nearly one-third of the S&P 500, marking the highest concentration level in decades and prompting demand for more diversified strategies.
Ben Cherrington, head of UK wholesale at Legal & General’s asset management division, said: “L&G has been vocal about this concentration risk for a number of years and following increasing interest from our clients and prospective investors, we are excited to launch this fund to satisfy that demand.
“We see this as a highly compelling proposition for investors seeking improved risk management, whilst retaining a diversified sector allocation and potentially lower volatility.”
L&G noted that the Magnificent Seven grew to such an extent that the Nasdaq 100 index had to undergo a ‘special rebalance’ to ensure that funds tracking the index did not exceed the concentration limits established by regulators.
The asset manager also said early indications suggest a divergence in the risk characteristics between the equal-weight and market-cap weighted versions of the S&P 500, which represents the primary opportunity the Legal & General S&P 500 US Equal Weight Index fund seeks to capture.
Russell Jones, head of index equities at Legal & General’s asset management division, finished: “Over the past two-and-a-half decades US benchmarks have never been as concentrated as they are today. We know that this is a growing concern as single stock momentum trends and volatility in the mega-cap tech sector continues.
“This launch of our equal weight strategy is in response to this, seeking to provide investors with balanced exposure to both the risk and return profile of the entire S&P 500, rather than the seven stocks that have dominated the index in recent years.”
Legal & General S&P 500 US Equal Weight Index will be managed by Jones, supported by LGIM’s index fund management team, which runs over $100bn in assets under management and comprises 25 managers with an average industry experience of 15 years.