S&P 50 now nondiversified?

[Scrapr]

According to this NYT article AI and Magnificent 7 have gone up so much that 4 stocks represent 26% of the fund. Same thing applies to Total stock market funds.
I think it may also be due to "discovering" index funds by investors that previously used brokers or DIY individual stocks. In the comments people mention buying international funds and value funds. Is it time to zag back to individual stocks? Any other strategies to overcome the imbalance?

https://www.nytimes.com/2026/01/30/business/stock-market-concentration-risk.html?unlocked_article_code=1.JFA.XcQd.JPIiE27J1apS&smid=url-share

 

[jebmke]

There are plenty of index opportunities to tilt away from tech; international is just one; as noted value is another. Individual stocks are not something I would consider. High quality, short to medium term bonds are also a means to mitigate some of the technology risk.

 

[audreyh1]

Over long periods of time different companies and sectors dominate the S&P500.

ETA: here is a later one that covers 1996 through early 2025. The above one covers 1980 through 2020, 4 decades, so maybe more interesting.

 

[Koolau]

I'm sure the S&P 500 is more concentrated than it was, but it's been fairly concentrated for quite some time. I'm guessing one of the reasons Vanguard, Fido, etc, can have such low expense ratios for their respective S&P 500 funds is that there's no attempt to adjust for the huge capitalization of the few funds that dominate.

I diversify away from the S&P 500 (as well as owning a V 500 fund). So I don't worry too much about the concentration.

 

[Al18]

The past 3 months haven’t been kind to the Magnificent 7 stocks. On URTH World ETF, the top 10 companies represent 27.3% of the fund.

 

[OldShooter]

People's fascination with the S&P continues to baffle me. There are something like 4,000+ US stocks and IIRC 10,000 international stocks. Certainly anyone holding only 500 stocks has a self-inflicted nondiversification problem. I have no sympathy for this.

We hold everything: VTWAX aka VT. The international components of this have been a bit of a drag until a year or so ago, but are now leading nicely (Diversification in action!) IMO international will continue to lead as movement away from the USD as the world's reserve currency continues. But regardless, we own the haystack.*

*Jack Bogle: “Don't look for the needle in the haystack. Just buy the haystack!”

 

[mrfeh]

People's fascination with the S&P continues to baffle me. There are something like 4,000+ US stocks and IIRC 10,000 international stocks. Certainly anyone holding only 500 stocks has a self-inflicted nondiversification problem. I have no sympathy for this.

We hold everything: VTWAX aka VT. The international components of this have been a bit of a drag until a year or so ago, but are now leading nicely (Diversification in action!) IMO international will continue to lead as movement away from the USD as the world's reserve currency continues. But regardless, we own the haystack.*

*Jack Bogle: “Don't look for the needle in the haystack. Just buy the haystack!”

I agree with you in general, but I wouldn't call 500 stocks non-diversified.

Hell of a lot better than individual stocks or sector funds.

 

[audreyh1]

I agree with you in general, but I wouldn't call 500 stocks non-diversified.

Hell of a lot better than individual stocks or sector funds.

But they are by definition all large cap stocks.

 

[disneysteve]

But they are by definition all large cap stocks.

The answer is VTI or VTSAX. Just buy everything.

 

[disneysteve]

I agree with you in general, but I wouldn't call 500 stocks non-diversified.

Hell of a lot better than individual stocks or sector funds.

Yes but why stop at 500 (well 503 actually). VTI has over 3,500.

 

[mrfeh]

But they are by definition all large cap stocks.

As I said, I agree with the gist of his post. I own total market funds, ex-US funds, and small-cap value funds.

But I also wouldn't call the S&P 500 non-diversified.

 

[mrfeh]

Yes but why stop at 500 (well 503 actually). VTI has over 3,500.

No reason to stop at 500.

But let''s not pretend there's a huge difference between total market and the S&P 500.

 

[Lorenzo]

Instead of an S&P 500 fund, you could consider a combination of a large-cap, a mid-cap, and a small-cap fund and adjust the allocation percentages to weight a hair more toward the mid and small than in the S&P 500. That is what I suspect my former financial advisor did in my case.

 

[audreyh1]

The answer is VTI or VTSAX. Just buy everything.

I use Total Stock Market FSKAX even though it is still dominated by large cap stocks being also market cap weighted.

I also have some mid-cap, small-cap and international index funds, although as I get older it tend to put any new equity buys into Total Stock Market.

 

[Al18]

Fidelity’s FXAIX SP500 fund where the top 10 companies represent 39.2% of assets. The most recent 10 year performance CAGR is 15.53%. $10K invested 10 years ago is now worth $41,862.

Compared to the URTH World ETF at 27.3%. 10 year performance CAGR is 13.18%. $10K invested 10 years ago is now worth $34,141.

 

[Scrapr]

The answer is VTI or VTSAX. Just buy everything.

I thought the same. If I buy the "whole" market I should be ok. Then I read this part of the article:
The market has become so highly concentrated that even the most comprehensive U.S. stock index funds are no longer well diversified. In fact, by a strict legal definition, they now are not diversified at all. If you believed that by buying an index fund that mirrored the entire stock market you were being protected by true diversification, it’s time to re-evaluate this crucial assumption.

And:
what has changed is the U.S. stock market itself. It has become so top-heavy that index funds mirroring the overall market are breaching legal thresholds for diversification set by the Securities and Exchange Commission to protect investors

and:
There is a danger when a fund becomes that concentrated, Vanguard warned. “The fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks, or even a single stock, and the fund’s shares may experience significant fluctuations in value,

My thinking: I think the problem may be acute if the AI stocks all drop at the same time the impact on index funds may be disproportionate to their % of the total. One bad quarter may show who is swimming naked when the tide goes out. I rebalanced 2x's in 2024. I'm 3-4% above my % threshold right now. Decisions is hard

 

[Out-to-Lunch]

if the AI stocks all drop at the same time the impact on index funds may be disproportionate to their % of the total.

Well, the impact will be EXACTLY proportionate. That is what index funds do!

 

[Scrapr]

Well, the impact will be EXACTLY proportionate. That is what index funds do!

I think that is the warning. The stocks will fall (or rise) disprortionately.

From Vanguard:
Vanguard warned. “The fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks, or even a single stock, and the fund’s shares may experience significant fluctuations in value,

 

[Al18]

You can easily diversify SP500 by buying RSP Equal Weight SP500 fund.

 

[audreyh1]

I expect a major reckoning on the way inflated AI related stocks. But I’m not going to try to avoid it. Cycles happen. If stocks drop enough I’ll buy more.

 

[NW-Bound]

No reason to stop at 500.

But let''s not pretend there's a huge difference between total market and the S&P 500.

Hmmm... My eyesight is getting bad. Where's my magnifying glass?

 

[ut2sua]

I think that is the warning. The stocks will fall (or rise) disprortionately.

From Vanguard:
Vanguard warned. “The fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks, or even a single stock, and the fund’s shares may experience significant fluctuations in value,

This ^^^ is the beauty of English (or any other languages). It can't describe accurately a math problem. I think the Vanguard warning is not what you think (but it is not your fault). I think Vanguard is saying, as an example, if Apple stock drops hard, it doesn't drop the S&P500 proportionally by 1/500 (Apple will drop the S&P500 a lot more than 1/500 even though Apple is just 1 out of 500) thus S&P500 drops disproportionally if Apple drops.
If the above makes sense...
Yah, it is complicated

 

[Texas Proud]

Soo, you can always buy Vanguard Extended Market fund... has no mega cap companies...

 

[Diogenes]

ETA: here is a later one that covers 1996 through early 2025. The above one covers 1980 through 2020, 4 decades, so maybe more interesting.

Apple attained the top spot in 2012, and has never relinquished it. Has that ever before happened in history? Microsoft darts in and out, but has been in the top-5 more or less for the entire 21st century. The FAANGs, or the MAG-7 or whatever we call them, have had 1-2 dropouts or new entrants, but essentially that cohort has been dominating the top spots since 2017 or so... that's nearly a decade.

The point: we're used to seeing rotation of leadership. Wheel in the sky, and that sort of thing. He that was first, he shall be last. And so on. GE was top for a while. Anyone heard of GE lately? And whatever happened to IBM? Concentrate too much, and you'll swiftly receive your comeuppance. Remember Intel? Cisco? But that's not been happening for the better part of a decade. A small roster of Bay Area and Seattle Area companies has been running the world... or as a famous VC guy quipped, eating the world. Do we think that that will change anytime soon?

 

[target2019]

Author provides what solution? Lol. It's NYT financial porn. Stay tuned for next month's followup article!

There are ways to use two or more funds to diversify by tilting.

VXF Completeness Index, for example.