Australian investors have embraced ETFs at an accelerating pace. The simplicity, low cost, and diversification that index funds provide have attracted record inflows, and the case for them remains sound. The question is not whether to use them — it is whether the specific US equity concentration that most Australian ETF portfolios carry is appropriate for the environment ahead.

The concentration problem

Two of the most popular US market ETFs available on the ASX — iShares S&P 500 (IVV) and Vanguard US Total Market (VTS) — are often held alongside global market ETFs like Vanguard MSCI International Shares (VGS). The problem is that VGS already derives approximately 70% of its exposure from US equities, predominantly large-cap names. An investor holding both VGS and IVV is not achieving the diversification the two ticker codes imply — they are doubling down on the same theme.

The concentration within the US indices themselves compounds this. The top 10 holdings of IVV account for 37% of the fund. Those holdings are dominated by the "Magnificent 7" technology companies — Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta, and Tesla. A portfolio heavy in IVV is, in practical terms, a large bet on a small number of US technology businesses.

Currency: a tactical consideration

For Australian investors, US equity exposure carries an embedded currency position. When you hold an unhedged US equity ETF, you benefit if the USD strengthens against the AUD — and you are hurt if it weakens. In the current macro environment, the structural case for a weaker USD is material:

  • Large US fiscal deficits requiring ongoing Treasury issuance
  • The explicit Trump administration interest in a weaker dollar to support domestic manufacturing competitiveness
  • Potential challenges to the USD's reserve currency status if confidence in US fiscal management declines

Hedged variants of popular US ETFs — such as iShares S&P 500 Hedged (IHVV) — remove this currency exposure. In an environment where the AUD may strengthen from historically low levels, hedged exposure deserves serious consideration as part of a US equity allocation.

The macro backdrop

Several respected macro analysts have raised concerns about US asset concentration that are worth taking seriously:

Macquarie strategist Viktor Shvets has argued that we may be entering a "1930s-style" environment defined by rising nationalism, economic volatility, and declining trust in global institutions. Matt King, founder of Satori Insights, warns that investors are underestimating the risks of the USD's reserve currency status being challenged.

"It's a dangerous time to be overexposed to US assets — and almost everyone is." — Greg Jensen, Co-Chief Investment Officer, Bridgewater Associates

KKR maintains a cautiously optimistic view on US equities but through a different lens than previous cycles: US productivity, capital-light business models, and asset-based finance rather than simple index exposure. The KKR "regime change" framework — larger government deficits, heightened geopolitical tensions, a messy energy transition, stickier inflation — argues for a more selective approach to US market participation.

Geographic diversification beyond the US

Several markets offer equity return drivers that are genuinely different from the US technology cycle:

  • Japan — corporate governance reform, shareholder return improvement, and a structural shift away from decades of deflationary stagnation
  • India — demographic dividend, domestic consumption growth, and relatively lower correlation to the US technology cycle
  • Germany and European industrials — defence spending uplift, infrastructure investment, and valuations that do not carry the US technology premium

PGIM's Shehriyar Antia notes that deglobalisation is slowing — if not reversing — in strategic sectors. Investors need to weigh not just return potential but exposure to supply chain concentration, political instability, and rising regionalism.

Passive does not mean set-and-forget

The rise of passive investing is well justified. Low costs, broad diversification, and consistent execution have made index funds the sensible default for most investors. But passive at the portfolio level — the allocation across different indices and regions — is a very active decision. The assumption that a standard Australian ETF portfolio is appropriately diversified deserves regular scrutiny.

In 2025 and beyond, the relevant questions are not whether to hold US equities — but how much, through which vehicle, hedged or unhedged, and alongside what else.