Your Index Fund isn’t as Diversified as You Think
If you have a retirement account, there's a good chance a big chunk of it sits in a large-cap index fund. And why not? Most have been told that it's the textbook definition of "safe and diversified". They contain a big bundle of the biggest companies, all in one low-cost basket. Buy it, hold it, and let it do the work. For decades that was enough.
But "500 companies" doesn't mean your money is spread across 500 companies evenly (it isn't), and right now it's less diversified than it has been in a very long time.
How the index actually divides your money
The S&P 500 (the index used in many funds) is what's called market-cap weighted. That's a fancy way of saying the biggest companies get the biggest slice. A company worth $3 trillion gets a much larger allocation than one worth $30 billion (a hundred times more). So when you buy the fund, you're not putting the same dollar into each of the 500 names. You're putting most of your dollars into the handful at the very top.
For most of the index's history, that top-heaviness was modest. In 1990, the ten largest companies made up roughly 20% of the whole index, and they were a genuine cross section of the economy: an oil company, a telephone company, a tobacco giant, a computer maker. If one stumbled, the others were doing something completely different.
Today, ten companies represent more than 40% of the index
That balance has changed dramatically. By the end of 2025, the ten largest companies made up nearly 41% of the entire S&P 500, according to a great piece by RBC Wealth Management titled The Great Narrowing.
In other words, nearly half of your "500 company" fund is really riding on 10 companies. And the top five alone are about a quarter of the whole thing. This means that for every $100 you put into an S&P 500 fund, more than $40 flows into just ten stocks. The other 490 companies split the remaining $60 or so among themselves.
Why this is even more alarming than the 90s bubble
The market has been top-heavy before. During the late-1990s tech bubble, the top ten crept up toward 27% before the whole thing unwound painfully. So high concentration isn't brand new, but two things make the concentration today even more alarming.
In the 90s, the giants at the top were not just tech companies but included conglomerates such as GE and ExxonMobil. Today's leaders — the mega-cap technology names — are largely bound together by a single theme: artificial intelligence. When companies are that correlated, they tend to rise together and fall together. The diversification you think you're getting from owning ten different names is even thinner when all ten are essentially in the same industry.
The second concerning fact is that stock prices have largely run ahead of profits in the current market. By the end of 2025, the top ten represented about 41% of the index's value but were expected to generate only about 32% of its earnings.
The feedback loop
Furthermore, because so much retirement money now flows automatically into index funds, and because those funds are required to buy the biggest names in the biggest amounts, new money keeps disproportionately propping up the stocks that are already the largest. Their weight grows, which pulls in more automatic buying, which grows their weight further. It's a machine that rewards big companies solely for being big companies.
I flagged this dynamic in my recent piece on the SpaceX IPO and its inclusion in the Nasdaq-100 index: index funds are price-blind buyers. This means that they don't ask whether a stock is a good deal. They just buy what the rules tell them to, in the amounts the rules dictate.
So how do I diversify?
Firstly, none of this makes the S&P 500 a bad long term holding. These are, by and large, extraordinarily profitable companies, and there are legitimate economies of scale that have allowed these companies to grow so large.
The important thing is to know what you actually own. A lot of people hold an S&P 500 fund and a large-cap growth fund and their employer's stock and a tech-heavy "diversified" fund. These may be four different funds, but many would be surprised to learn that all four are, under the hood, largely the same ten companies stacked on top of each other.
There are many different ways to add proper diversification. For instance there are equal-weight index funds, small-cap and mid-cap funds, international equity funds. These are all some pieces of the puzzle in a properly diversified portfolio. How to incorporate these, and in what amounts, is going to vary based on your unique situation and is definitely a conversation worth having with a professional.
The bottom line
The S&P 500 is still one of the great wealth building tools ever made available to ordinary investors, but just holding the index at this particular time is risky. Right now, a bet on the S&P 500 is, to a large degree, a concentrated bet on a small cluster of AI driven mega-caps. That may work out beautifully or it may not. Either way, it’s important to take a look under the hood and understand what you’re really holding.
Disclosure
Convivia Financial LLC is a registered investment advisor. This article is for general informational purposes only and reflects the author's opinions as of the date of publication, which are subject to change without notice. Nothing herein constitutes investment, legal, or tax advice, nor is it a recommendation, offer, or solicitation to buy, sell, or hold any security. All investing involves risk, including loss of principal. Past performance does not guarantee future results. Information from third-party sources is believed reliable but has not been independently verified. As of the date of publication, the Firm and/or its associated persons do not hold positions in the securities discussed. Registration as an investment advisor does not imply any particular level of skill or training. For more information about the Firm, including fees and conflicts of interest, please refer to our Form ADV Part 2A available upon request.
