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Political developments in the United States are currently unsettling the stock markets. However, US President Donald Trump is not the only one who could cause stock market turbulence. Other candidates: an escalating conflict in Taiwan, which could disrupt chip supply chains, distortions on the US bond markets in view of the constantly growing mountain of debt in the USA and setbacks in the AI boom. However, completely unexpected events can also cause market turbulence, as the Covid pandemic, the Ukraine war or the real estate crisis in China show1. Anyone who believes that an ETF on broadly diversified equity indices such as the leading US index S&P 500 or the popular MSCI World Index can eliminate these risks is quickly confronted with another problem: the high degree of concentration in certain parts of the market.
In recent years, a small group of technology-oriented stocks has had a significant impact on the US markets and helped the stock markets to reach new heights. The group of companies that industry experts refer to as the “Magnificent Seven” include Apple, Microsoft, Amazon, Alphabet, Tesla, NVIDIA and Meta. Seven companies represent 1.4% of all stocks in the S&P 500, which tracks the 500 largest listed companies in the USA. However, these mega-caps recently accounted for around 31%2 of the index's market capitalization, up from just 17%3 five years ago. This means that buying an ETF on the S&P 500 does not cover the entire US economy evenly, but invests around a third of your money in companies in the same sector.
This development has been boosted by several significant factors, including the fact that the “Magnificent Seven” are leaders in the development of cutting-edge technologies such as artificial intelligence, cloud computing and electric vehicles. In addition, these companies have significant market dominance in their respective industries, which has contributed to steady revenue and profit growth. While there have been many benefits to owning these stocks in recent years, it may be useful to consider the cluster risk that has been created by their high proportion in the major and mainstream equity indices. In addition to the S&P 500, the “Magnificent Seven” also have a significant weighting in the NASDAQ-100 technology index, the broader-based Russell 2000, the aforementioned MSCI World and the world indices MSCI ACWI and the FTSE All-World.
A closer look at the well-known MSCI World Index, which comprises the largest companies in the industrialized countries - a total of almost 1,500 companies from 23 countries - shows that the weighting of the United States has risen continuously in recent decades. Currently, US companies make up around 70% of the index4, which means that the index represents more “US” than “world”. Such lumps can make a portfolio riskier.
In the event of increasing market volatility, particularly in the technology sector, or growing political uncertainty in the US, this could have a disproportionate impact on global indices with a high concentration of US technology giants. This is where the sword of the “Magnificent Seven” proves to be double-edged. Should we continue to bet on the stocks that have dominated the markets in recent years in the hope that they will remain as successful? Or is it questionable whether the potential of these stocks can continue to unfold at the current pace?
In order to minimize cluster risk and achieve a more balanced regional diversification, strategies such as the MSCI World ex-USA index are now available. It offers broad exposure to global equities of large and medium-sized companies from 22 developed markets, while explicitly excluding the USA. If you don't want to completely do without the USA in your own portfolio, you can add American equities to your portfolio separately, for example by using a second, pure USA ETF. The advantage: you determine the size of the cluster risk in your portfolio yourself.
The Xtrackers MSCI World ex USA UCITS ETF 1C, which tracks the MSCI World ex-USA Index, could be a suitable solution for strategically adjusting the weighting of US equities in a global portfolio allocation and potentially benefiting from opportunities in other regions of the world.
1 DWS CIO View Special, 10 themes for the coming year: When it's at its best, you should make provisions - PDF.
2 Source: DWS, 2025.
3 Source: Bloomberg Finance L.P., Aladdin 4/2024. Past performance is no guarantee of future results. Index performance assumes reinvestment of dividends; however, these figures do not include fees, transaction costs, taxes, brokerage costs or other changes
4 Source: MSCI, 2025.
This document is a marketing communication.
All statements of opinion reflect the current assessment, which may change without prior notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may prove to be incorrect or inaccurate. Past performance is not a reliable indicator of future performance. Source: DWS International GmbH; as of 17.03.2025.
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