The New Zealand stock market has something to teach U.S. investors about the risks and rewards of a top-heavy market. That’s because New Zealand’s market is dominated by just a handful of big companies. In fact, it’s one of the most top-heavy stock markets in the world.

Consider the MSCI New Zealand IMI 25/50 Index, which its creator says is “designed to measure the performance of the large-, mid- and small-cap segments of the New Zealand market.” One company, Fisher & Paykel Healthcare
accounts for almost one-quarter of the index. In the S&P 500
in contrast, the weight of the largest stock — Microsoft

— is 7.3%.

And Fisher & Paykel is not a fluke. The second-biggest company in the MSCI New Zealand index, Auckland International Airport
has a 22% weight. In contrast, the index weight of the second-largest S&P 500 stock — Apple

— is 6.5%. The top five companies in the New Zealand index represent more than 60% of the index, while the top five in the S&P 500 represent about 25%.

The New Zealand stock market hasn’t always been dominated by large companies. But the distribution of its market capitalization has been heavily skewed throughout its history. A century ago, for example, the country’s economy “was built on a few primary products, notably wool, meat and dairy products,” according to the UBS Global Investment Returns Yearbook.

To appreciate the impact of a skewed distribution, consider how much of a difference it has made in the U.S., with its relatively equal weighting. The market-cap-weighted S&P 500, which is dominated by its largest companies, produced a 23.2% total return over the past year, according to Morningstar. That compares with a return of 6.4% for the equal-weight version of the S&P 500.

Skewed market-cap distributions work both ways. Sometimes they can lead to impressive performance, as has been the case in New Zealand over the long term. The country’s stock market has had one of the best returns since 1900 of any in the world, according to the UBS yearbook, as you can see in this chart.

Such concentration can just as easily lead to market-lagging performance, however, and this has been the case in recent years in New Zealand. The iShares MSCI New Zealand exchange-traded fund
has lagged the Vanguard Total World Stock ETF
over the past year by 24 percentage points, and over the past five years by about 9 percentage points.

The investment implication: Know what you’re buying when you invest in an index that is market-cap-weighted. You may think you’re buying pieces of all the companies in that index, when essentially you’re investing in a few large companies that dominate that index. That isn’t necessarily a bad idea, but it’s an entirely different investment than buying equal-sized pieces of hundreds of companies.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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