You see it everywhere. The S&P 500 index is often treated as a barometer for the entire stock market, its performance flashing across news tickers, financial reports, and the evening news. But how well do investors truly understand what they’re buying when they invest their money into an S&P 500 index fund?
Index investing has become the go-to strategy for those seeking broad market exposure, with an assumption being that the S&P 500 represents a well-diversified slice of the economy. The logic seems sound – 500 companies spanning multiple industries should, in theory, provide a balanced investment.
But is that really the case in 2025? As the S&P 500 becomes increasingly concentrated in just a handful of stocks, are investors getting the diversification they expect, or are they unknowingly taking on greater concentration risk than they realize?
The answer might surprise you.
How does the S&P 500 work?
The S&P 500 is an index that measures the performance of the large-cap segment of the U.S. market. Just as its name indicates, it is composed of 500 constituent companies. The 500 companies included in the S&P 500 index are “weighted by float-adjusted market capitalization.”[1]
This means that in the S&P 500 index, bigger companies make up a larger percentage of the index but only based on the shares that are available for the public to trade (i.e., not shares held by insiders).
Think of it like a pie – each company in the index gets a slice, but bigger companies get bigger slices.
The Concentration Risk in S&P 500 Index
Over the past decade, the S&P 500 index has experienced significant concentration in its top holdings, raising concerns about diversification for passive investors.
As of the end of 2024, the top 10 stocks constituted 38.7% of the index, with seven of these being technology and internet companies. The top five companies—Apple, NVIDIA, Microsoft, Amazon, and Alphabet— comprised 28.7% of the S&P 500’s market capitalization. That level of concentration in the top 5 companies is the highest it has been since 1980 and is a 17.3% increase in less than ten years.[2]
The increasing dominance of a few large-cap technology stocks has led to a market environment where passive investments in an index fund that tracks the S&P 500 may inadvertently result in concentrated portfolios that no longer align with an investor’s investment strategy.
This concentration suggests that if you are relying solely on S&P 500 index funds for your equity allocation, you may be more exposed to specific sectors than anticipated.
Diversification
The trend towards concentration in the S&P 500 index underscores the importance for investors to reassess their strategies to ensure diversification.
Diversifying simply means spreading your investments around broadly, potentially investing in different sized companies from various regions and industries. Diversification may help reduce the risk you are taking on in an attempt to achieve a certain level of risk.[3]
Think of it this way. For every 100 dollars invested into an index fund that tracks the performance of the S&P 500, approximately 38 dollars are invested in only ten companies, seven of which derive from similar industries. Furthermore, the remaining 62 dollars will not have any allocation toward, small, mid-cap, or international companies.
That level of diversification may not be appropriate for you, depending on your particular investment strategy and wealth plan, but you do have options.
How we can help
Our team takes the concept of risk versus safety seriously.
We believe that you may benefit greatly from allowing our advisors to carefully analyze your current investment allocation to determine what level of concentration risk you may be unknowingly exposed to.
Contact us today for a free portfolio analysis.
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[1] S&P Dow Jones Indices, S&P U.S. Indices: Methodology, February 2025. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-us-indices.pdf
[2] Sohn, Todd. Strategas & Bloomberg, Equity Flows Reflect High Expectations for 2025, ETF Research, January 7, 2025.
[3] https://www.fidelity.com/learning-center/trading-investing/too-much-one-investment