BlackRock’s S&P 500 top 20 ETF has garnered significant attention since launch, breaking the diversification mould associated with UCITS ETFs by offering high octane exposure to a handful of large-cap names.
Fund selectors remain split on the ETF’s merits, with some wary of a narrow basket amid over-concentration concerns within US equities, while others view it as a representation of “quality over quantity”.
The iShares S&P 500 Top 20 UCITS ETF (SP20) is listed on the London Stock Exchange (LSE), Deutsche Borse and Euronext Amsterdam with a total expense ratio (TER) of 0.20%.
SP20 offers targeted exposure to the largest 20 companies within the S&P 500 index, capturing the market heavyweights driving the majority of the parent index’s returns.
The timing of BlackRock’s new ETF is intriguing and its validity hinges on the lens through which it is viewed.
On one hand, its exposure is in stark contrast to the equal-weight strategies that have gained significant traction, with record inflows in Q2 and continued popularity into Q3.
Underlining this point, Alex Watts, fund analyst at interactive investor said the launch seemed “contrarian” given other asset managers’ fund launches targeting equal-weight S&P 500 exposure.
“This follows a period of outperformance of large-cap US equities, especially the magnificent seven, particularly over the past two years and rich valuations at the large and mega-cap end of the index.”
On the other hand, SP20’s 47% weighting to the information technology sector presents an opportunity to capitalise on the tech sector’s impressive and continued rally.
Brett Pybus, head of iShares EMEA product strategy, said: “With this ETF, European investors are now able harness the power of growth and innovation within the largest US companies in a targeted way. The performance dispersion within the S&P 500 has created a need for precise exposure to US equities.”
In light of SP20's launch, ETF Stream spoke with fund selectors about the trade-offs between concentration and diversification, with opinions diverging on the ETF’s role within portfolios.
While some fund selectors view it as a targeted, cost-efficient tool for capturing market leaders, others have pointed to risks of its narrower focus.
Concentration versus diversification
BlackRock noted the S&P 500’s top 20 constituents drove over 68% of its returns in the past three years, with SP20’s benchmark outperforming the S&P 500 by 1.8% annually over the last decade.
Despite this, fund selectors were mixed on the merits of a more concentrated exposure to the S&P 500.
For example, Nathan Sweeney, CIO of multi-asset of Marlborough, spotlighted the benefits of the ETF’s concentrated approach, describing it as a more “efficient” way to gain exposure to the US market.
Sweeney noted that SP20 is an attractive option for fund selectors prioritising “quality over quantity.”
“This ETF provides direct access to high-quality stocks that represent the backbone of the US economy," he said.
"By filtering down to the top 20 by market cap, BlackRock delivers a concentrated, selective investment, ideal for building a solid foundation in US equities."
Meanwhile Alex Funk, chief investment officer at PortfolioMetrix said the SP20’s narrow exposure adds unnecessary risk.
"When considering portfolio risk, we believe that limiting ourselves to just 20 stocks, or even 500, introduces additional unwarranted and potentially unrewarded risk," he said.
Instead, Funk advocated for broader exposure. "This is why we prefer the Vanguard fund, which tracks the S&P Total Market Index and provides exposure to over 3,000 companies."
Other fund selectors were more neutral, with Alberto García Fuentes, head of asset allocation at ACCI Capital Investments spotlighting the trade-off between returns and risk in concentrated strategies.
"If history repeats itself and companies that have contributed to the S&P in terms of earnings and performance continue that momentum, this ETF is a place to be."
"On the other hand, this potential higher return could add a degree of risk and lack of diversification to the portfolio," he added.
Risk-return trade-offs
Funk expanded on the risks of over-concentration, arguing that focusing on just 20 companies introduces unnecessary challenges.
He warned: “Market timing, especially at such a granular level as 20 stocks, can add significant risk to a portfolio and relies heavily on making a few large decisions correctly. As we know, market timing is notoriously difficult, and very few consistently get it right.”
Meanwhile, Andreas Bickel, CIO and head of the investment office at Lienhardt & Partner Privatbank Zurich, voiced doubts about the ETF's long-term prospects, tying its current popularity to the AI-driven rally but questioning its sustainability over time.
He noted, "Once we witness a reversion to the index concentration...this trend might disappear."
Echoing his views Terry McGivern, senior research analyst at AJ Bell said the launch might be “one financial historians cite in years to come”.
“…a time where investors saw diversification as 'diworsification', where we all allowed ourselves to be lulled into the idea that the mega cap tech, ‘Mag 7’ story would go on forever,” he explained.
A complement, not a new core
García Fuentes suggested the ETF could function as a satellite allocation within a broader portfolio, particularly for overweighting sectors like technology.
He noted SP20 is a good match for "a strategic position in technology" when paired with diversified holdings, such as small caps or equally weighted indexes.
Meanwhile, Alex Funk said a long-term, strategic approach that prioritises broad diversification over tactical plays like concentrated ETFs is more desirable.
"We adopt a long-term strategic view rather than a short-term tactical approach," underscoring the risks of narrow focus,” he said.
Zooming out, Paul Surguy, head of investment management at Kingswood Group noted there has been an uptick in index subset launches recently, and added “the more tools that are available at decent pricing can only be a benefit to the industry."
