Index funds are the default choice for investors who don’t want to bet on individual stocks. But the market is making a pretty big bet for them. Tech’s growing weight in major indexes means even a plain S&P 500 fund comes with a hefty dose of concentration risk.
What’s actually inside the basket
Count technology, communications services, and other tech-heavy names, and the broader tech universe makes up more than half of the S&P 500’s $70T market value. The US market hasn’t often been this top-heavy.
There’s also a lot more money following indexes than there used to be. US equity funds hold more than $16T, and roughly 70% of those assets are passively managed, according to Société Générale.
Just three S&P 500 ETFs show the scale. State Street’s, iShares Core, and Vanguard’s manage nearly $2.7T combined and have pulled in almost $3T cumulatively since 2019.
Index quirks produce accidental winners
The S&P 500 isn’t the only index where the label can hide what’s driving returns. In early 2021, money-losing GameStop and AMC Entertainment briefly became the largest constituents of the Russell 2000 Value Index.
Strategy and Super Micro Computer created another oddity a few years later. Both grew so quickly that they hardly looked like small caps anymore, yet together they accounted for one-third of the Russell 2000’s gain in the first quarter of 2024 before being removed.
Emerging markets have their own version. In May, three chip makers, Taiwan’s TSMC, Samsung Electronics, and SK Hynix, contributed more to the MSCI Emerging Markets Index’s gain than its roughly 1,100 other stocks combined.
Why the core still wins
None of this makes broad indexing a bad strategy. The Vanguard 500 Index Fund recently turned 50, and its performance ranks between the 81st and 90th percentiles among all funds, including those that eventually shut down.
That last part matters. Funds often disappear after poor performance dries up their assets, according to Lawrence Tint, former US chief executive of Barclays Global Investors.
Stock picking faces an even tougher hurdle. From January 1926 through December 2025, just 46 of 29,754 US-listed stocks accounted for half of the market’s $91T in net wealth creation, according to Arizona State finance professor Hendrik Bessembinder.
“My evidence says if you pick 10 stocks at random, most likely you’re going to underperform.”
Hendrik Bessembinder, Arizona State University
That’s the advantage of owning the whole market. You don’t have to figure out which tiny group of stocks will end up doing most of the work.
How to spread the risk
The concentration problem doesn’t mean investors need to ditch their index funds. Wealth managers still recommend keeping 80% to 90% of stock holdings in a broad-market index fund as an inflation hedge. Inflation was running above 3% in August, while S&P 500 companies were projected to post 23% third-quarter earnings growth.
But investors can spread their bets around the core. The traditional stock-and-bond split didn’t offer much protection in 2022, when both fell together, prompting managers to look toward shorter-duration bonds, commodities, and alternatives.
Equal weighting offers another route. Instead of putting the most money into the market’s biggest companies, these funds give each holding the same weight. Invesco Russell 1000 Equal Weight is one option.
Some investors go the other way and pair an index core with a smaller allocation to concentrated funds. The GMO U.S. Quality ETF owns 43 stocks, while its older institutional sibling returned 16.1% annualized over 10 years, beating 94% of large-blend peers.
Alger Focus Equity shows the other side of that trade. Its 42-stock portfolio, with a 47% tech weighting, returned 21.7% annualized over a decade but plunged 36.0% in 2022, compared with an 18.2% decline for the S&P 500.
Concentration can juice returns when the right stocks are winning. It hurts just as quickly when they aren’t, and today’s default index fund already comes with plenty of it.
That matters more when Americans have so much riding on stocks. Equities now account for almost 47% of US households’ financial assets, a record, leaving more household wealth exposed to the same group of market leaders.
WisdomTree’s Aneeka Gupta argued last month that positioning has become too concentrated for comfort. Ameriprise’s Anthony Saglimbene made a similar case, urging investors to diversify both within and outside their tech exposure.
Getting away from AI entirely isn’t easy when its footprint stretches from stocks and credit to emerging markets and private assets. Investors don’t necessarily need to run from that trade. They should know how much of it they already own.
