OBJECTIVE Some non-Western immigrant groups in Europe have elevated risk of psychosis relative to native-born. It is hypothesized that neighborhood ethnic density moderates this risk. Immigration to Sweden has increased substantially recently, particularly from the Middle East. This study examined the relationship between neighborhood ethnic density (i.e., living in an immigrant enclave) and risk of psychotic and affective disorders among three groups: Iraqi immigrants, immigrants from other nations, and native-born Swedes. METHODS Individuals aged 15-60, without prevalent psychopathology, were drawn from Swedish population-based registries and followed from 2005 to 2010 (N = 950,979). Multi-level logistic regression was used to examine the association between neighborhood ethnic composition and incident psychopathology. RESULTS Cumulative incidence of psychopathology was greater in Iraqi enclaves relative to predominantly Swedish neighborhoods (6.3 vs. 4.5%). Iraqis living in enclaves did not have significantly greater risk of psychosis (Odds Ratio (OR): 1.66, 95% Confidence Interval (CI) 0.92-2.97) or affective disorders (OR: 1.04, 95%CI 0.85-1.27) relative to those in predominantly Swedish neighborhoods. There was no increased risk of psychosis (OR: 0.93, p > 0.05) or affective disorders (OR: 0.93, p > 0.05) for other immigrants living in an enclave. Swedes living in an enclave had elevated risk of both psychosis (OR: 1.37, p < 0.05) and affective disorders (OR: 1.14, p < 0.05) relative to those in predominantly Swedish neighborhoods. Second-generation Iraqis had higher risk of psychotic but not affective disorders relative to first-generation. CONCLUSIONS Neighborhood ethnic density does not moderate risk of psychopathology for immigrants in Sweden. Findings regarding Swedes are consistent with social drift.