The illusion of diversification: hidden concentration risk in JSE index trackers
By Izak van Niekerk, Portfolio Manager at Merchant West Investments
Many South African investors assume that holding a low-cost JSE equity index tracker provides broad, safe diversification for their retirement savings.
By holding the market, the logic makes you believe that you spread risk across banks, insurers, technology, retail, mining, telecommunications, industrials and even have some exposure to large global companies like AB-Inbev, British American Tobacco and Richemont.
The reality, however, is that market-cap weighting on the JSE, combined with the surge in precious metals equities over 2025 and early 2026, created a large concentration, leaving long-term capital exposed to volatile commodity cycles.
To be clear, passive index investors have had a great run.
The large upward move in gold and platinum group metal (PGM) equities over 2025 and early 2026 delivered exceptional returns, lifting headline benchmarks and boosting tracker fund performance.
If you held an index tracker, you directly benefited from that resource rally.
However, the mechanism behind passive market-cap tracking creates a forward-looking risk: index trackers continue to own and buy more of whatever has already increased in price.
As precious metal counters surged, their market caps expanded rapidly.
Consequently, Gold and PGM miners command a disproportionately large weight in local indices.
As recently as the end of February they made up about 34% of the FTSE/JSE Top 40 and 30% of the FTSE/JSE Capped All Share Index.
Over the last few months investors have learned that this can cut both ways, since a monthly peak at end February, the FTSE/JSE Precious Metals and Mining Index was down about 40% to the end of July (and still down about 30% counting the recent bounce up to mid-August).
Despite this decline, concentration remains high at about 28% of the FTSE/JSE Top 40 and 24% of the FTSE/JSE Capped All Share Index as at mid-August.
What is generally a reasonably diversified retirement basket has transformed into a heavily concentrated allocation to precious metals miners.
Precious metal miners are inherently cyclical and subject to operational variables that traditional corporate compounders do not face to the same degree.
Earnings are dictated by two key variables beyond these companies’ control: rand/US$ fluctuations and global spot commodity prices. These are highly volatile and cyclical.
High operating leverage combined with heavy reinvestment requirements mean a modest softening in realised metal prices can compress operating margins and free cash flow available for dividends rapidly.
Consequently, the generous dividend payouts we are now seeing can evaporate quickly.
When an index tracker is heavily weighted toward precious metals miners, investors carry large single-sector risk precisely when earnings might be peaking.
Holding a concentrated index during a commodity boom is rewarding but holding it when the cycle turns can severely impair retirement capital.
This is where actively managed multi-asset and balanced funds serve a critical function. Active managers have the mandate to trim overextended, high-beta precious metal miners and realise profits before cyclical pullbacks occur.
They can also risk manage and allocate to relatively higher quality miners to continue to benefit if the cycle extends, but limit losses if the cycle turns.
Capital is also prudently allocated across multiple asset classes, markets and sectors to reduce portfolio volatility and risk relative to an equity index tracker.
Riding the resource wave in a passive tracker was a profitable trade. But treating a concentrated JSE tracker as a long-term, low-risk retirement strategy is a mistake.
For investors looking to protect accumulated wealth, transitioning from a rigid equity tracker into a well-managed, balanced strategy is the prudent move to ensure long-term capital preservation.
Click here to secure your tomorrow with Merchant West.
Merchant West Investments (Pty) Ltd. (Reg no. 2006/018046/07) is an Authorised Financial Services Provider (FSP 44508).
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