Why more investors are considering active equity ETF investing

Looked under the hood of some of the largest, most followed equity indices lately?


Some investors may be surprised by what they see. The exposure of the flagship global equity benchmark MSCI All Country World Index (ACWI) to U.S. companies is at record levels, having grown from a 53.3% weight as of March 31, 2013 to 64.4% as of August 31, 2024. The move up has primarily been driven by a handful of companies in the information technology and communication services sectors, which have also had an outsized impact on the S&P 500 Index.


The 10 largest companies in the widely followed S&P 500 (which includes NVIDIA, Microsoft, Meta, Apple, Amazon and Alphabet) accounted for a remarkable 34.2% of the total market capitalization of the index as of August 31, 2024. Investors may also be taken aback by the fact that this level of concentration is higher than it was during the dot-com bubble in 2000.


Market concentration has exceeded levels from the dot-com bubble

The dual line chart depicts the percent of market capitalization in the top 10 companies (%) comparing the S&P 500 index and MSCI EAFE index from 1996 to 2024. The x-axis spans the years from 1996 to 2024, while the y-axis represents the percent of market capitalization in the top ten companies. The S&P 500 roughly starts at 17%, peaks around 27% during the dot-com bubble in early 2000, dips to around 17% around 2014, and then shows a steady increase with some fluctuations reaching its highest point in recent years. As of August 31, 2024, it stood at 34.2%. In contrast, the MSCI EAFE index begins at 11%, peaks around 20% during the dot-com bubble and then follows mostly a downward trend, with minor fluctuations, ending at 15.4% as of August 31, 2024.

Sources: Capital Group, Morningstar, MSCI, Standard & Poor's. As of August 31, 2024. Percentages shown are the sum of the top-10 holdings of each index on a monthly basis. 

When it comes to the MSCI EAFE (Europe, Australasia, Far East) Index, which tracks international stocks, concentration is less of a worry, as the above chart shows. It’s important, however, for investors to know it is less inclusive country-wise than some may expect. The index tracks developed countries only, which means developing countries such as China, India and Brazil are excluded from it. This limits the investment universe for investors in a passive ETF tracking the MSCI EAFE, which means there are fewer countries and companies from which to build a well-diversified international portfolio. 


Further, EAFE country allocations are weighted according to market capitalization, or size. Countries with the largest stock markets (Japan and the U.K.) will have the largest relative weighting in the index, which may or may not be good news depending on the year, or years, and an investor’s investment objective.


That’s one reason actively managed ETFs are gaining market share from their passive ETF cousins. In fact, actively managed ETFs account for almost 30% of the total $503 billion ETF market in Canada, according to Morningstar, as of August 31, 2024. From a product perspective, almost half of the nearly 1,500 ETFs available are now actively managed, also as of August 31, 2024.


Gaining traction


Active vs. passive ETF assets under management market share

The chart shows the total amount of assets invested in Canadian ETFs and the division between active and passive ETFs. The x-axis depicts dollar amounts invested starting at zero and ending at $500 billion, while the y-axis shows the passage of time starting at January 2016 and ending as of April 2024. The amount of money invested in passive ETFs starts at roughly $50 billion and rises to about $300 billion over the period. The amount of money invested in active ETFs starts at about $10 billion during their first full-year year of availability and steadily rises to about $150 billion. Active ETFs have now reached 30% in terms of overall ETF market share over the timeframe.

Source: Morningstar, as of August 31, 2024.

Active vs. passive ETFs


Actively managed ETFs share many of the same capabilities as passive index-tracking ETFs — intraday trading, liquidity and cost efficiency — but with some key differences. Active ETFs give the portfolio manager the flexibility to diversify away from certain securities that may be a large part of the index and hold stocks with no, or a much smaller, footprint in the index to seek better, more targeted outcomes for investors.


There are, for instance, many companies across a broad range of industries in global, international and U.S. markets with superior businesses, strong reliable cash flows and earnings growth potential that have a smaller footprint or weighting in the index, hence smaller impacts on results.


Within the MSCI EAFE, German software developer SAP, which does not even make it into the top 10 companies in the index, was considered to have been left in the dust when U.S. hyperscalers shifted to the cloud. The company has since made a successful transition to the cloud and expanded its business by simplifying its offerings.


Beyond the tech sector, French jet engine maker Safran is tapping into rising global demand for air travel. The company also generates recurring revenue streams through services and maintenance contracts for the engines.


Turning to the S&P 500 Index and looking beyond the companies that dominate the index, earnings growth across market sectors shows surprisingly robust growth for a number of sectors, relative to their own histories.


Technology isn’t the only sector generating earnings growth

The chart plots one-year forward price-to-earnings ratios and earnings per share estimates with five-year historical averages for the S&P 500 Index and nine subsectors of the index as of September 4, 2024. The overall S&P 500 reflected a price-to-earnings ratio 1.6 points higher than its five-year average and forward earnings growth 6% higher than its long-term average. Three subsectors, information technology, health care and financials, reflected price-to-earnings ratios and earnings growth estimates relative to their histories that were both higher than the overall index. The industrials, communication services and consumer discretionary sectors reflected price-to-earnings ratios that were lower and earnings growth estimates that were higher than the overall index relative to their own histories. Consumer staples and utilities reflected price-to-earnings ratios and earnings growth estimates relative to their own histories that were both lower than the overall index. The materials sector reflected a price-to-earnings ratio relative to its own history higher than the overall index and earnings growth estimates relative to its own history lower than the overall index.

Sources: Capital Group, FactSet, Standard & Poor's. Price-to-earnings (P/E) ratios are based on one-year forward earnings per share (EPS) estimates. Current EPS growth is based on the annualized earnings growth for 2023 to 2026 across sectors based on 2023 actuals and consensus EPS estimates for 2024 to 2026. Historical averages for earnings growth are based on the annualized earnings growth between 2018 to 2023 for each sector. Excludes real estate and energy sectors. As of September 4, 2024.

One company far from the headlines within the S&P 500 health care sector is U.S.-managed services company UnitedHealth. It seeks to help government agencies and health care providers reduce spending and improve outcomes for patients. The company has been investing in predictive analytics and care delivery to reduce inefficiencies in the U.S. health care system.


Other under-the-radar companies in the MSCI ACWI include India-based PB Fintech, Switzerland-based Givaudan Sa and Japan-based TDK Corp.


The key, of course, to understanding the future trajectory of any company lies in fundamental research. An experienced active manager backed by global research with a repeatable investment process can help identify the leaders of tomorrow in contrast to market indices, which are backward-looking.


To illustrate, the table shows the top 10 largest companies by market capitalization that have led global equity markets in each of the past four decades, and in 2023. As you can see, each decade has produced different leaders, in different regions and countries.


The leaders of today may not be the leaders of tomorrow*

The table shows the world’s top ten largest companies by market capitalization excluding Aramco over five decades, the 1980s, 1990s, 2000s, 2010s, 2020s and for the year 2023. In the 1980s, the largest companies starting from the top were, IBM, Exxon, AT&T, Standard Oil of Indiana, First Quantum Minerals, Standard Oil of California, British Petroleum, Atlantic Richfield, General Electric and General Motors. In the 1990s, the largest companies starting from the top were IBM, Exxon, Industrial Bank of Japan, Fuji Bank, General Electric, Philip Morris Companies, Sakura Bank, Sumitomo Mitsui Banking, Dai-Ichi Kangyo Bank and Toyota. In the 2000s, the largest companies starting from the top were Microsoft, Cisco Systems, General Electric, Intel, Vodafone Group, Exxon Mobil, Deutsche Telekom, Nokia, NTT and Wal-Mart. In the 2010s, the largest companies starting from the top were Exxon Mobil, PetroChina, Apple, BHP Group, Microsoft, ICBC, Petrobras, China Construction Bank, Shell and Nestlé. In the 2020s, the largest companies starting from the top were Apple, Microsoft, Amazon, Alphabet, Tencent, Tesla, Facebook, Alibaba, Samsung and TSMC. In 2023, the largest companies starting from the top were Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, Meta, Eli Lilly, Broadcom and TSMC

*As listed in FactSet. First Quantum Minerals was officially incorporated in 1983 and renamed Xenium Resources. Observation date for each set of holdings is December 31 of the year. For example, for 1980, the observation date for the largest companies is 12/31/1980. The exception is for 2000, which uses the observation date of 2/28/2000, as it reflects the closest month-end peak of the tech bubble. Source: Capital Group. As of December 31, 2023.

In short, the index leaders of today may not be the leaders of tomorrow, but active strategies, backed by global research, can help identify those that may be.


Capital Group has two actively managed equity ETFs designed to strengthen the core of a portfolio.


Learn more about ETFs

Related content

Published on October 23, 2024

Commissions, trailing commissions, management fees and expenses all may be associated with investments in investment funds. Please read the prospectus before investing. Investment funds are not guaranteed or covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. For investment funds other than money market funds, their values change frequently. For money market funds, there can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Past performance may not be repeated.

Capital Group exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF units are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Units may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.

The ETFs are prospectus qualified in Canada and are not registered with the United States Securities and Exchange Commission and are not intended for distribution in the United States.

Unless otherwise indicated, the investment professionals featured do not manage Capital Group‘s Canadian investment funds.

References to particular companies or securities, if any, are included for informational or illustrative purposes only and should not be considered as an endorsement by Capital Group. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds or current holdings of any investment funds. These views should not be considered as investment advice nor should they be considered a recommendation to buy or sell.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not be comprehensive or to provide advice. For informational purposes only; not intended to provide tax, legal or financial advice. We assume no liability for any inaccurate, delayed or incomplete information, nor for any actions taken in reliance thereon. The information contained herein has been supplied without verification by us and may be subject to change. Capital Group funds are available in Canada through registered dealers. For more information, please consult your financial and tax advisors for your individual situation.

Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made herein. We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward-looking statements.

The S&P 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

FTSE source: London Stock Exchange Group plc and its group undertakings (collectively, the "LSE Group"). © LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. "FTSE®" is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under licence. All rights in the FTSE Russell indices or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indices or data and no party may rely on any indices or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company's express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The index is unmanaged and cannot be invested in directly.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

MSCI does not approve, review or produce reports published on this site, makes no express or implied warranties or representations and is not liable whatsoever for any data represented. You may not redistribute MSCI data or use it as a basis for other indices or investment products.

Capital believes the software and information from FactSet to be reliable. However, Capital cannot be responsible for inaccuracies, incomplete information or updating of the information furnished by FactSet. The information provided in this report is meant to give you an approximate account of the fund/manager's characteristics for the specified date. This information is not indicative of future Capital investment decisions and is not used as part of our investment decision-making process.

Indices are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in Canada, the U.S. and other countries. All other company names mentioned are the property of their respective companies.

Capital Group funds are offered in Canada by Capital International Asset Management (Canada), Inc., part of Capital Group, a global investment management firm originating in Los Angeles, California in 1931. Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

The Capital Group funds offered on this website are available only to Canadian residents.