Target Diversification

 Market cap weighting is the standard allocation methodology in index construction and offers clear benefits with respect to representativeness, investability as well as turnover. Over the last year, however, market concentration has reached extreme levels in the US. Market concentration heightens individual holding risk and diminishes the independent drivers of return. It obviates the whole point of an index as a diversified set of investments. An extreme solution for the concentration issue is equal weighting. In addition to these two extremes, the market cap weighting and the equal weighting, we introduce a more nuanced weighting scheme that allows you to target diversification directly. It offers lower tracking error, lower style exposures and higher liquidity than equal weighting, and greater diversification compared to market cap weighting.