If you own a global index fund, whether it tracks the MSCI All Country World Index or a similar benchmark, you probably think of it as diversified. The word “global” is right there in the name. You own stocks from dozens of countries across every sector. Diversification achieved.

Except that is not quite what is happening.

As of early 2026, US equities account for approximately 65% of the MSCI ACWI. Within that US allocation, a handful of technology companies, sometimes called the Magnificent Seven, account for a disproportionate share. By some estimates, fewer than ten companies represent over 20% of the entire global index. When you buy a “global” fund, you are making a very large bet on a very small number of American technology stocks.

This is not a criticism of those companies. They are extraordinary businesses that have earned their valuations through sustained innovation and profit growth. The question is whether a portfolio that is 65% concentrated in one country and 20% concentrated in fewer than ten companies is actually delivering the diversification that investors believe they are getting.

The performance record is more nuanced than you think

The case for global index funds rests partly on the assumption that the US market will continue to outperform. Over the past fifteen years, this has been overwhelmingly true. The S&P 500 has delivered returns that have made other developed markets look irrelevant by comparison.

But the past five years tell a more nuanced story. The TOPIX, Japan’s broad market index, has outperformed the MSCI ACWI over this period on a local currency basis. When you compare the ACWI against the S&P 500, the global fund underperforms precisely because it dilutes US exposure with markets that have lagged. And when you compare individual countries, Japan’s recent performance stands out.

This is not to suggest that the S&P 500 will underperform going forward. It may not. The point is that concentration in any single market carries risk, and the assumption that US outperformance is a permanent feature of markets is a bet, not a fact.

The hidden currency concentration

There is another dimension of concentration that most investors overlook: currency. A global index fund denominated in dollars does not just give you equity exposure across countries. It also gives you currency exposure. And because 65% of the fund is in US equities, your currency exposure is heavily skewed toward the dollar.

If the dollar strengthens, this helps your returns from the non-US portion of the fund (because those returns are converted back into more valuable dollars). But if the dollar weakens, which is the direction that current policy signals from the Treasury and the Fed suggest, the non-US portion suffers a currency headwind, and the US portion provides no currency benefit because it is already in dollars.

A deliberate allocation to Japanese equities, by contrast, gives you explicit yen exposure. If the yen appreciates as the interest rate differential narrows, that currency movement adds to your return rather than being a residual effect buried inside an index.

Drawdown behaviour matters

Diversification is supposed to protect you during market stress. This is one of the primary arguments for owning a global fund rather than a single-country fund. In theory, when one market falls, another holds up, and the portfolio is cushioned.

In practice, global index funds have not always delivered this protection. During the 2020 pandemic crash and the 2022 rate-shock sell-off, ACWI declined almost in lockstep with the S&P 500. The US dominance of the index means that a US-driven sell-off pulls the global fund down with it. The “diversification” across other countries is too small a share of the portfolio to provide meaningful cushioning.

Maximum drawdowns for the ACWI have been consistently deeper than what a truly diversified global portfolio would suggest. And recovery times have been extended, partly because the non-US components of the index include emerging markets that are slower to recover during risk-off periods.

The case for deliberate allocation

None of this means you should abandon global index funds. For many investors, they remain a sensible core holding that provides broad exposure with minimal effort. The issue is whether they should be your only holding, and whether the “diversification” label gives false comfort.

A more deliberate approach might involve maintaining a global index fund as a base, but adding targeted exposure to markets where the fundamental case is strong and the correlation with US equities is lower. Japan is a candidate for this kind of allocation.

Japanese equities are driven by a different set of factors than US technology stocks: corporate governance reform, domestic inflation dynamics, BOJ policy normalisation, and fiscal spending. The correlation between the TOPIX and the S&P 500, while positive, is meaningfully lower than the correlation between the S&P 500 and the ACWI, precisely because the ACWI is so dominated by US stocks.

Adding Japanese equity exposure outside of your index fund gives you genuine diversification: different sector composition, different currency, different monetary policy cycle, and different valuation regime. Where US index returns are driven by technology earnings multiples, Japan offers exposure to a rate normalisation cycle that is lifting an entire financial sector from decades of suppressed profitability. It is the kind of diversification that a “global” index fund promises but does not fully deliver.

Something to consider

The global index fund has been one of the great innovations in retail investing. It democratised access to markets and reduced costs dramatically. But the product has evolved in ways that its early advocates might not have intended. A fund that is two-thirds concentrated in one country and one-fifth concentrated in fewer than ten companies is a very different proposition from the broadly diversified portfolio that most investors think they own.

Understanding this concentration is not a reason to panic. It is a reason to ask whether your portfolio is doing what you think it is doing, and whether a deliberate allocation to markets like Japan might provide the diversification that the label on your global fund implies but the contents do not deliver.

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