BlackRock’s new S&P 500 3% capped ETF is a timely and sensible alternative to equal weight for investors concerned about concentration risk, fund selectors say.
The iShares S&P 500 3% Capped UCITS ETF (SP3C) was unveiled shortly after Donald Trump’s sweeping ‘Liberation day’ tariffs triggered a sell-off spearheaded by the biggest names which highlighted how the fortunes of the market still hinge on a small handful of stocks.
Indeed, the top 10 constituents of the index account for more than one-third of its value with the largest – Apple – currently 7% of the index.
By capping each stock’s weight at 3%, SP3C reduces the importance of the largest and most highly valued companies to returns but not to the same extent as an equal weight ETF in which every stock is weighted at 0.2%.
On balance, fund selectors were broadly positive on SP3C although some pointed to other routes investors can take to mitigate concentration risk.
Concentration risk
Maxime Terrier, portfolio manager at Union Bancaire Privée (UBP), said SP3C represents a “middle ground” between equal weight and market cap weight S&P 500 ETFs.
“It also allows for some variation in stock weights, maintaining a sector balance more closely aligned with the market compared to the equally weighted approach which often results in higher exposure to smaller companies and sectors,” he explained.
Stephan Kemper, chief investment strategist at BNP Paribas Wealth Management, and Nathan Sweeney, CIO multi-asset at Marlborough, both described SP3C as an “interesting” way to manage concentration risk within US equities.
For Sweeney, relative to equal weight it is “more palatable for investors concerned about valuation risk in those names, while still wanting exposure to their growth potential, just with a little less dependence on their performance.”
However, Alex Funk, CIO at PortfolioMetrix, said “if the goal is purely to gain cheap diversification away from the ‘Mag 7’, the capped ETF may not provide as much underweight exposure across these companies as one might expect.”
He noted that while the technology sector is underweighted by 8% relative to the cap weighted S&P 500 – Apple, Nvidia, Microsoft and Amazon are underweight for instance – it is roughly equal weight in Netflix and marginally overweight in Tesla.
“One should be sure that the relative underweights is aligned to the tracking error and active risk you want to bring to the portfolio,” he said. “For us, if concentration is a concern, perhaps active management gives you the same outcome but with the added benefit of security selection.”
A well-pitched launch
Sweeney described the timing of SP3C’s launch as “well-pitched”.
“With US trade policy uncertainty on the horizon and ongoing questions around inflation, interest rates, and AI-driven earnings expectations, there is plenty of incentive to diversify beyond the mega-caps,” he added.
Terrier agreed, adding that “in times of economic uncertainty or volatility, investors often seek strategies that reduce risk…this new launch is looking to capture market interest and meet evolving investor needs.”
Kemper was more equivocal on the timing aspect. “It is good in the sense that it helps mitigating concentration risks but it is probably less ideal in respect to the market outlook. We still think that risk of a US recession - albeit not our base case - is underpriced.”
Final word
For Kemper, “the current high concentration risk is a reason for concern and should be addressed by investors…[because] investing into the leaders of today has produced historically positive returns but below the outcome of the benchmark.”
To-date equal-weight ETFs have captured much of the flow from investors nervous about concentration risk but there are question marks over how suited they are to this role.
As Sweeney put it, SP3C "is not a silver bullet, but it offers a sensible alternative to equal weight – less volatility from smaller caps, and more balance across sectors.”
