Does Holding Both Global Equities and the S&P 500 Give You Diversification?
A column looking past the names to the overlap between a global equity fund and the S&P 500
Holding both a global equity fund and an S&P 500 fund makes it easy to feel I have split across the world and the US, so I am diversified. But that is the impression the names create. In practice, most global equity indices carry a high weight in US equities, and layering the S&P 500 on top tends to mean holding the S&P 500's major names twice over.
- The word
globalin a name does not by itself mean adequate diversification. - Most global equity indices already contain a large amount of US large caps.
- Adding the S&P 500 on top of that tends to mean holding the major names twice.
- That is not wrong in itself, but it reads less as
diversificationand more asholding more US.
1. The name "global" tells you nothing about the diversification inside
When a product name contains global, it looks broadly diversified on that basis alone. But with index products, actual weights matter far more than the name. Most global equity indices naturally weight countries and companies by market capitalisation, so US equities end up with a considerable share.
In other words, global does not mean spread evenly across the world. It is closer to reality to understand it as: hold the whole world by market capitalisation and the US share is usually large.
2. Adding the S&P 500 tends to mean holding major names twice
The S&P 500 is the index representing US large caps. Global equity indices, meanwhile, already contain plenty of US large caps. So holding both tends to mean holding major names such as Apple, Microsoft, and Amazon twice over.
In that state, the count has risen to two funds while the overlap inside remains substantial. It may look as though you split between global and US, but often you have simply thickened the US large-cap weight further.
3. If you pair them, understand it as "holding more US" rather than "diversifying"
Holding both is not necessarily wrong. If your intent is use global as the base but hold a little more US, that is a coherent strategy.
But in that case the meaning is not holding two funds to diversify — it is holding two funds to add US weight. Being able to draw that distinction in words is what matters. If you are thinking I hold these to diversify, it may be worth looking inside again.
As 4-2 The three axes of diversification showed, diversification in funds is easier to sort out across the three axes of product type, sector, and country/region. Following that, rather than layering the S&P 500 to thicken US large caps further, filling the country/region gap with something like a global ex-US fund, or combining a different product such as bonds or REITs, tends to raise the diversification benefit more.
To check, these three are enough.
- How much of the global equity fund the US accounts for
- How far adding the S&P 500 pushes the US weight
- Whether your own intent is
diversificationorholding more US
Even under the name global, the actual contents can carry a high US weight. Before adding the S&P 500, simply looking at the overlap in major countries and top holdings makes the quality of your diversification much easier to judge.
Returning to the main text
- How to choose a fund: 3-5 What to check when choosing a fund
- The three axes of diversification: 4-2 The three axes of diversification