![\"\"](\"https:\/\/www.newsbeep.com\/il\/wp-content\/uploads\/2026\/07\/CIOJunOSC5-1303893651.jpg\")
<\/p>\n<\/p>\n
Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management, in a recent paper<\/a>, suggested exchange-traded funds as tools to maintain liquidity and flexibility when rebalancing portfolio exposures away from growing concentration risk, especially in passive global equity portfolios. Because the U.S. represents more than 60% of global equity market capitalization, passive global equity allocations are trending toward being \u201cless global and less diversified,\u201d he wrote.<\/p>\n Jared Gross<\/p>\n Given the rapid valuation growth of some U.S.-based mega-cap technology companies and the possibility of more colossal initial public offerings to come, Gross proposed the ETF market as a tool for rebalancing without requiring a wholesale change of equity policy weights.<\/p>\n Gross spoke with CIO Executive Editor Amy Resnick this month about what investors can do if they are concerned about global equity concentration risk by region, sector and strategy. The interview was edited for clarity and conciseness.<\/p>\n CIO: Your paper addresses how allocators can use exchange-traded funds to add flexibility, liquidity and transparency to their portfolios and reduce exposure to concentration within their passive benchmark.<\/p>\n GROSS: I think you really kind of hit the nail on the head as far as what we were trying to get at with this, because there are sort of two layers to it. One is the \u2026 macro layer of investors who look at a passive global benchmark, \u2026 usually \u2026 the MSCI All Country World Index. \u2026. They assume, given the breadth of that benchmark, that it provides \u2026 broadly diversified access to the global [equity market] opportunity set. CIO: How are you suggesting doing that?<\/p>\n GROSS: What [investors] are not going to do, typically, is sift through the thousands upon thousands of securities and build your own portfolio. [They\u2019re] going to look for alternative benchmarks, manager strategies, systematic strategies and so forth that will [provide] \u2026 access to a more broadly diversified mix of risk.<\/p>\n CIO: And you\u2019re suggesting that one of the effective ways to do that is utilizing ETFs?<\/p>\n GROSS: Yes. ETFs as a vehicle choice, I think, are particularly well-suited because many of these solutions involve some degree of \u2026 either tactical adjustment by the asset allocator or they are probably expected to be temporary. I use that term lightly, because temporary could be weeks or months, it could be, potentially, years. But \u2026 the ability to move in and out of markets quickly and efficiently with a sort of transparency that ETFs provide is a good thing. \u2026 It doesn\u2019t mean you couldn\u2019t achieve something similar if you used a separate account or if you used a mutual fund. But ETFs, I think, have emerged and have sort of established themselves as being a very effective vehicle for \u2026 tactical portfolio adjustments. \u2026 I think this is a very good use case for ETFs, even though it\u2019s not the only path that you could go down.<\/p>\n CIO: Do you mean that ETFs serve as portfolio building blocks?<\/p>\n GROSS: That\u2019s exactly right. I think what many investors may not fully appreciate is how broad that tool kit is. Because within the ETF space, \u2026 when they first emerged, most ETFs were passive equity strategies. Over time, they have grown in a number of dimensions. CIO: How does that work?<\/p>\n GROSS: When you reflect on where we are today, we have a very concentrated exposure to a very highly valued U.S. market. It may be some investors would say, \u201cI don\u2019t feel comfortable pushing down on the weight [of U.S. stocks in the portfolio], but within that U.S. weight, I would rather find some other forms of protection, which could be active management, systematic or risk management.\u201d<\/p>\n CIO: Are you suggesting an overlay or just a differently constructed portfolio?<\/p>\n GROSS: A good example would be \u2026 [using] call options to sell upside and produce a lot of income. The blended mix of risk and return tends to have less volatility than . ..just being exposed to the index alone. There are also versions \u2026 of hedged strategies where you sell a call option. So you give away some upside and you buy downside protection\u2014you\u2019re essentially collaring the space. CIO: For an institutional audience, what kind of asset owner would you see this approach being most attractive to? A pension fund, a smaller endowment, a foundation?<\/p>\n GROSS: I think it could be all of the above. You know, one thing we\u2019ve observed is that pensions, \u2026 particularly corporate pensions, \u2026 used to have very large public equity allocations. \u2026 They had a lot of individual managers doing individual things. Particularly in corporate pensions, those equity portfolios have shrunk over the years. \u2026 It\u2019s not uncommon to see a corporate pension that may be exposed to the global equity market either entirely through a passive [MSCI] ACWI-style benchmark or that may be a large portion of their remaining equity. \u2026 If your starting point is a passive global equity portfolio, regardless of how large it is and regardless of how many other things you might have, \u2026 the premise of the paper is that that is an increasingly concentrated risk that may not reflect your original intent in terms of gaining broad, diversified exposure to the global markets. \u2026 If it\u2019s only 5% of your portfolio, you may not feel that it\u2019s a large enough problem to \u2026 deal with affirmatively, but if it\u2019s 40% of your portfolio, you might very easily decide that this is a problem you want to address in a more direct way.<\/p>\n CIO: How does the active vs. passive investing discussion fit in?<\/p>\n GROSS: I think this is a case where you have to separate \u2026 two arguments about active versus passive. There is \u2026 a very well-established debate about where and how active management in public equities can be successful. The general consensus over time has been that the larger markets and the more heavily capitalized markets are more challenging for active managers to generate positive returns on a consistent basis. CIO: How can investors access those opportunities?<\/p>\n GROSS: I think, are there good companies in France and Germany and Sweden and Japan and Argentina and \u2026 Saudi Arabia? There are. If the benchmark is squeezing capital out of those markets and pushing it into a very narrow set of markets, you\u2019re going to be less exposed to those opportunities. \u2026 This is why in this current situation, active management is a responsible choice as an alternative to index concentration \u2026 independent of the very specific questions about manager selection. <\/p>\n CIO: So what does your paper suggest?<\/p>\n GROSS: A good way to think about that is: If you observe that the U.S. has a very high weighting in the global market, in the passive benchmark, and you say, \u201cOK, that feels uncomfortable to me,\u201d and you\u2019d like to reduce that, you can simply bifurcate the global benchmark into U.S. versus international. \u2026 Many investors have a target allocation to those two subcomponents \u2026 not simply mimicking what the ACWI produces. \u2026 At times they might be overweight the U.S. relative to the ACWI. At times they might be underweight. They have to make some judgment about that. \u2026. You can essentially assert control or agency over your portfolio allocation and not be dependent on the index methodology to drive where, globally, you\u2019re allocating capital. Tags: active vs. passive<\/a>, benchmarks<\/a>, equity markets<\/a>, exchange-traded funds<\/a>, portfolio risk<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management, in a recent paper, suggested exchange-traded…\n","protected":false},"author":2,"featured_media":519765,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[114,268,85,46,266,267],"class_list":["post-519764","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-finance","tag-il","tag-israel","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/519764","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=519764"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/519764\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/519765"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=519764"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=519764"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=519764"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/www.newsbeep.com\/il\/wp-content\/uploads\/2026\/07\/Jared-Gross-headshotweb-210x210.jpg\")
<\/p>\n
When you actually lift the hood and look at how that index is weighted today, you see that it is massively exposed to the United States. Within that United States allocation, it is heavily tilted toward large-cap, technology-focused companies. \u2026 None of this has escaped the attention of investors broadly, but it does call into question the \u2026 original purpose of that benchmark and whether \u2026 this is an opportunity or this is a moment when you should look for opportunities to de-concentrate that portfolio.<\/p>\n
One dimension is they have expanded into other asset classes\u2014fixed income and elsewhere. They have moved from passive to active. They have also grown to encompass systematic strategies [such as] factor-based allocations, which essentially are alternative models of weighting the security-level allocations, rather than just using cap weighting, which is the baseline for most passive strategies. Now there are an increasingly large number of \u2026 what I would call risk management strategies that embed options to protect portfolios against extreme moves.<\/p>\n
This [offers] exposure to the index, but within a boundary. \u2026 This is just an example of a strategy where an investor says, \u201cI feel like I have maybe more exposure to the U.S than I would like.\u201d [That investor] may not be prepared to reweight the benchmark itself to, say, \u2026 more Europe, more Japan, more emerging markets. But if [the investor doesn\u2019t] feel comfortable doing that, [they] might say, \u201cI just want to reduce the risk I\u2019m taking within the U.S. piece of the portfolio.\u201d [They] could do that by pivoting from cap weighting to active [weighting], potentially, if you have more of a value bias or a quality bias in your portfolio, or you can do it in a more mechanical way by using some of these option-based strategies.
But either way, you\u2019re likely to have a reduced amount of risk, which I think, again, given where we are in the cycle and where the markets are right now, might feel very comfortable to some investors as a way to take a little bit of that potential volatility off the table.<\/p>\n
There are always active managers who are outperforming these benchmarks. The real challenge is finding an individual manager who does so with consistency. That\u2019s not impossible either\u2014there are managers who do that with consistency.
But \u2026 I think there has been a general awareness on the part of investors that in those types of market environments choosing a passive strategy is \u2026 less of a concern \u2026 because you\u2019re likely giving up \u2026 less potential alpha, and you\u2019re sidestepping the risk of manager underperformance and so forth. So that\u2019s one side of the active-passive debate.
There\u2019s another side, which is, \u201cDoes the index construction methodology\u2014particularly with respect to cap weighting, the sort of momentum bias that that imparts to portfolios\u2014is that something that you can and should rely on across time to always produce a better outcome?\u201d I think in that respect, there is a much clearer sense that at moments in time and often quite frequently, it does not.
In the paper, we use \u2026 a very \u2026 resonant example, which is this: Prior to the U.S. currently having such a large allocation\u2014currently the U.S. is north of 60% of the global benchmark\u2014the last time we saw something like this was in the late 80s, when Japan was about 45% of the global equity market. Nobody today looks back on that and says, well, \u201cHindsight is 20\/20, but that was a really smart allocation decision back in the late 80s.\u201d I think most people would say that was a mistake.
Now we don\u2019t know how the U.S. is likely to turn out, and we\u2019re not predicting that it\u2019s going to have anything like what happened to Japan in terms of a real estate and banking and insurance crisis and \u2026 decades of economic paralysis. That is, by no means, \u2026 our case for the U.S., but \u2026 the sort of dynamic that\u2019s at work under the surface [today], \u2026is rising valuations pull in more capital and concentrate that capital in an increasingly narrow part of the opportunity set. [That] \u2026 therefore leaves investors less exposed to what could be very attractive investment opportunities in parts of the world where the benchmark simply allocates less capital.<\/p>\n
In some of those markets, you may independently decide that active management is superior to passive or, based on where they are in the cycle, you might want to own more value versus growth or quality versus momentum. What the ETF complex allows you to do, with a very small set of asset-allocation choices, is to impart a lot of useful direction to your portfolio. \u2026 You don\u2019t have to make \u2026 thousands of security-level choices. You don\u2019t even have to go through a manager selection process if you choose not to. You can do this passively.
Or a nice step in between passive and active, for those who are interested, is systematic strategies, where [investors] [use] an alternative weighting model to \u2026 move away from cap-weighting\u2014which has sort of pushed capital into this increasingly narrow, concentrated benchmark\u2014and restore a little more balance by allocating against factors like growth or value or quality.
That\u2019s become an increasingly accessible asset allocation choice. I think ETFs are the ideal vehicle to make these types of choices because \u2026 it\u2019s also very easy to [go in and] come out, if the markets move and you decide that you no longer want to maintain that style of investment.
We talk about this in the paper \u2026 we offer some solutions to concentration, and many of those solutions can be effectively implemented with ETFs.
Over the long run, the value of having ETFs in the toolbox will remain, even if the problem goes away. So even if \u2026 there\u2019s greater balance across the benchmark, which many investors would think of as a positive, \u2026 you still have the flexibility to use ETFs in other ways down the road.
I think it\u2019s a good opportunity for people to embrace the vehicle choice, while at the same time solving what may be a challenging kind of investment decision as well.<\/p>\n