How to counter the ASX 200's Achilles heel

The S&P/ASX 200 Index (ASX:XJO) has many strengths, but also one Achilles heel weakness. Here's how to plug this hole in your portfolio

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (ASX: XJO) is a magnificent share market. As my Fool colleague Brooke Cooper discussed this morning, there are many things to love about our flagship market index. We have a plethora of impressive, world-class businesses. We have strong transparency and insider trading laws. And the ASX 200 has, over time, delivered strong, inflation-smashing returns that would make any other asset class blush.

But nothing is perfect in its world. And the ASX 200 is no different. So what exactly is the ASX 200's Achilles heel?

Well, see if you can guess after the top 10 ASX 200 companies by market capitalisation are listed here. The weightings are according to iShares in the iShares Core S&P/ASX 200 ETF (ASX: IOZ).

ASX 200 Share ASX 200 Weighting
Commonwealth Bank of Australia (ASX: CBA) 7.89%
BHP Group Ltd (ASX: BHP) 6.94%
CSL Ltd (ASX: CSL) 6.06%
Westpac Banking Corp (ASX: WBC) 4.72%
National Australia Bank Ltd (ASX: NAB) 4.49%
Australia and New Zeland Banking Group Ltd (ASX: ANZ) 4.21%
Wesfarmers Ltd (ASX: WES) 3.01%
Macquarie Group Ltd (ASX: MQG) 2.66%
Woolworths Group Ltd (ASX: WOW) 2.58%
Rio Tinto Limited (ASX: RIO) 2.12%

So these 10 ASX shares make up around 44.7% of the entire index. See any patterns? Let me help out. CBA, Westpac, NAB, and ANZ, as well as Macquarie, are all ASX banks. These banks together make up approximately 24% of the ASX 200. Throw in the large miners in BHP and Rio Tinto and we get to 33%.

Sure, we have a healthcare company in CSL, as well as retail giants in Woolworths and Wesfarmers. But it's still not what you would call 'balanced'.

The ASX 200's Achilles heel

You might notice one glaring omission in this list: ASX tech companies. Sure we have many quality tech companies on the ASX. There's Afterpay Ltd (ASX: APT), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO). But none of these companies, even together, have a massive, or even significant, presence in the ASX 200. Even Afterpay is only worth 1.33% of the index.

Yet tech is going to be a big part of the future of the ASX 200 if the growth of this sector over just the past year is any kind of indication. This could be called the ASX 200's Achilles heel.

So how do we combat this Achilles heel? One way could be by turning to overseas sharemarkets. Take the United States. The US has two of the most popular indexes int the world in the S&P 500 Index (INDEXSP: .INX) and the NASDAQ-100 (INDEXNASDAQ: NDX). Both of these indexes are dominated by tech companies like Apple Inc (NASDAQ: AAPL), Microsoft Corp (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Tesla Inc (NASDAQ: TSLA), and Facebook Inc (NASDAQ: FB). Both can be accessed via exchange-traded funds (ETFs) on the ASX such as the iShares S&P 500 ETF (ASX: IVV).

Another option one could consider is the BetaShares Asian Technology Tigers ETF (ASX: ASIA). This ETF holds a portfolio of Asian tech shares like Alibaba Group Holding Ltd, Tencent Holdings, and Taiwan Semiconductor Manufacturing Company.

Adding a tech-based ETF to your ASX share portfolio could well plug the ASX 200's Achilles heel. We can all love our index. But recognising its flaws could help strengthen your ASX portfolio. Something to keep in mind!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sebastian Bowen owns shares of Facebook, National Australia Bank Limited, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Apple, Facebook, Microsoft, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Altium and recommends the following options: short March 2023 $130 calls on Apple, long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, and long March 2023 $120 calls on Apple. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers ETF and Macquarie Group Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Wesfarmers Limited, Woolworths Limited, and Xero. The Motley Fool Australia has recommended Amazon, Apple, Facebook, and iShares Trust - iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

A business person holds a big balloon in front of their face.
How to invest

I'm fine with a stock market crash. You might be too

This article might leave you longing for a ride to the downside.

Read more »

Humorous child with homemade money-making machine.
How to invest

How I'd fill an empty ASX share portfolio to build a $500 monthly passive income machine

Building an ASX passive income portfolio simpler than you may think.

Read more »

A smiling woman with a handful of $100 notes, indicating strong dividend payments
How to invest

How to realistically turn a $7,000 ASX share portfolio into $75,000 by 2030

The Australian share market is a great place to grow your wealth. Over the years, countless Aussies have constructed ASX…

Read more »

Happy young couple saving money in piggy bank.
How to invest

4 steps to becoming rich with ASX stocks

These are the steps I would take to grow my wealth materially.

Read more »

Person with a handful of Australian dollar notes, symbolising dividends.
Investing Strategies

Want cash like Warren? How to stack paper without ditching ASX shares

Life is about trade offs.

Read more »

five people in colourful blow up tubes in a resort style pool gather and smile in a relaxed holiday picture.
Dividend Investing

5 simple steps to earning $500 in monthly ASX passive income

Almost any investor can build a $500 monthly passive income from ASX dividend shares.

Read more »

A businesswoman on the phone is shocked as she looks at her watch, she's running out of time.
How to invest

How timing the market can cost you big dollars

And one simple way ASX investors can avoid the urge...

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
How to invest

5 easy ways to invest like Warren Buffett with ASX shares

Here’s how we can imitate Warren Buffett with ASX shares.

Read more »