Is an ASX 200 index fund actually as safe as you think?

This interview was filmed 3rd June 2026.

Many Australians who invest in the sharemarket are told the same thing: buy an ASX 200 index fund, keep costs low, and let it compound. It's hard to argue with the logic.

Cameron McCormack, senior portfolio manager at VanEck, has spent a lot of time thinking about this. His conclusion is that passive exposure to the ASX 200 carries risks that don't get nearly enough attention.

"60% of the index is made up of financials and materials. And if you look at the top 10 names, they're almost 50% of the ASX 200."

That's not diversification in any meaningful sense. It means that when CBA has a bad quarter (which it did recently, dropping 10% after its trading update), it doesn't just affect CBA shareholders, it affects almost everyone with passive Australian equity exposure.

In this interview, he breaks down what investors in passive ASX 200 funds may be overlooking, why standard quality screens fall short in the Australian market, and the three-factor approach behind the newly launched VanEck MSCI Australian Quality Plus ETF (ASX: AQTY).

The problem with banking on the banks

Australia's big four banks make up a significant chunk of any passive ASX 200 fund, and according to McCormack, there are reasons to look at that exposure carefully. 

Across the sector, McCormack points to rising accruals - an early indicator that earnings quality may be softening - alongside rising arrears and broader stress building in the system.

The issue isn't any one bank having a bad quarter. It's that a passive ASX 200 fund gives you no way to respond when conditions across an entire sector start to shift. You own whatever the index gives you, in whatever weighting it dictates.

"Even those types of companies are vulnerable to disappointment. And when expensive companies disappoint, they typically fall more than the market."

McCormack explains that's where AQTY is designed to work differently. Rather than holding the ASX 200 as-is, it overweights companies that score well on quality, value, and low volatility, and crucially, underweights those that score poorly.

When a sector looks stretched on valuation or shows deteriorating fundamentals, the fund naturally dials back that exposure rather than holding the same weighting a passive fund would.

Why quality investing in Australia is trickier than it sounds

The logic behind quality investing is straightforward: find companies with strong fundamentals and they tend to hold up better when markets get difficult. 

In Australia, however, the same screening approach produces a strange result.

"When it comes to Australia and applying the same mechanism for screening, the outcome is really interesting in that it actually gives you overweight exposure to materials and underweight exposure to financials," says McCormack.

Resources and mining companies are inherently cyclical. Their fortunes rise and fall with commodity prices, Chinese demand, and global growth cycles. 

A quality screen that loads you up with that kind of exposure isn't doing what quality investors expect it to do. You end up with more cyclical risk, not less. This is the puzzle VanEck set out to solve with AQTY.

What AQTY actually does

The fund combines three factors: quality, value, and low volatility. Quality finds companies with strong fundamentals. Value screens out expensive names. Low volatility targets companies that move around less than the broader market day to day.

The index construction splits into two sub-portfolios. The largest companies by market coverage are always included, so the top holdings will look familiar. 

But the weighting is where it diverges from a typical passive fund. Companies that score well across all three metrics get overweighted. Those that score poorly get underweighted. McCormack explains:

"You're still expressing your fundamental view in terms of harvesting quality outcomes, but taking a more balanced bet in terms of those active weights."

The second portion of the portfolio is drawn from smaller companies, and only includes those that score well across all three factors, plus a momentum overlay to capture companies already moving in the right direction.

The backtested numbers showed 2.4% outperformance over 15 years, compared to the S&P ASX 200, with lower sensitivity to market swings in both up and down periods. Noting that this is not an indicator of future performance of the fund. 

The strategy showed its strongest relative performance during periods of rising market volatility and lower economic growth — which brings us to where Australia economically sits right now.

Why the timing matters

McCormack points to inflation sitting above 4%, while economic growth is expected to fall below 2% by the end of the year and remain there through 2027.

"In terms of the economic backdrop, it's not looking as favourable when you look at Australia compared to our international counterparts."

There are also supply chain concerns tied to the closure of the Strait of Hormuz, which Australia is more exposed to given how much of its supply runs through that route.

"A lot of people are anticipating us to enter what's called a stagflation environment," says McCormack - higher inflation alongside weaker growth, which limits what the Reserve Bank can do and squeezes margins for companies that can't pass costs on.

The businesses that tend to hold up in that environment are what McCormack calls "HALO companies" - those with strong enough pricing power and market position to pass cost increases on to consumers and protect their margins.

McCormack labels a few that come under this umbrella. Transurban is a good example, with toll road revenues directly linked to inflation. Wesfarmers has the market share and bargaining power to absorb cost pressures without surrendering margin. And Telstra recently raised mobile plan prices and the market responded positively - a sign that their dominant position in the market translates to pricing power.

"If they can pass that on and still maintain margins, they will typically be rewarded for that."

The broader point McCormack makes isn't that passive investing is wrong. It's that in a market as concentrated as the ASX 200 - and in an economic environment as uncertain as this one - the structure of what you own matters as much as the decision to invest at all. 

A passive fund is a bet on the index as it's built. AQTY is a bet on reshaping that exposure toward companies better placed to weather what's coming.