Concentration Risk in Focus

Diversification in Decline

The S&P 500 was once a gateway to broad exposure across the U.S. economy: banks, energy, manufacturing, and consumer goods. It served as a built-in diversification tool, helping balance risk across sectors. However, what was once broad-based beta is increasingly tethered to a narrow group of mega-cap growth stocks.

Entering 2025, the S&P 500 had shifted notably, with its top 10 companies accounting for 38% of the index. By July 2025, that exposure remained elevated at 37.3%.¹ For comparison, the top 10 exposure was closer to 17.8% in 2015, and even at the peak of the dot-com bubble, it topped out around 27%.²

To see the impact more clearly, consider this: if an individual has $1 million passively invested in an S&P 500 fund, $373,000 of that is allocated to just 10 companies. The remaining $627,000 is spread across the rest of the index. This concentration has also influenced returns, with a small group of stocks driving much of the market’s gains this year.

More notably, most of these top firms are tech-related, with the “Magnificent 7” accounting for roughly 34% of the S&P 500. To put it in perspective, Nvidia alone carries nearly as much weight as the bottom 250 companies combined.³

The Illusion of Diversification

While the S&P 500 still appears diversified on the surface, index mechanics increasingly reward size over balance. As market-cap leadership compounds, traditional asset allocation frameworks can quietly drift into concentrated exposures that contradict their original diversification goals.

Today, Information Technology comprises over 33% of the index, while Communication Services and Consumer Discretionary, both heavily influenced by a few dominant firms, bring that total to nearly 55%.⁴ This concentration reflects a leveraged position in a single growth narrative more than a broad representation of the U.S. economy.

Lessons in Complacency

Concentration risk extends beyond equities. Before the 2014–2016 oil price collapse, energy made up nearly 20% of the high-yield bond index.⁵ When prices plunged, energy issuers faced widespread downgrades and defaults, dragging down the index. Many active managers were able to lessen the impact from the fallout, while passive strategies tended to mirror the steep declines. This episode underscores how sector dominance can amplify risk and challenge passive approaches.

The largest S&P 500 names have performed strongly in recent years, encouraging investors to double down on familiar winners. This comfort can lead to complacency, a potential blind spot driven by behavioral biases like familiarity and recency effects. A setback in one or two of these giants can expose portfolios to risks far greater than many investors realize.

Risk in Passivity

Passive investing often provides cost efficiency but may lack risk efficiency. Many passive portfolios carry embedded concentration risks exceeding those of their active counterparts. Traditional approaches to sector diversification or style neutrality may no longer apply as correlations among dominant stocks rise.

Advisors should be aware of this risk, and investors should understand the impact of concentrated investments, both across sectors and within the largest holdings. Understanding how these positions interact with other assets in the portfolio is also essential to managing risk. Ensuring that overall risk and return remain aligned with their goals means recognizing vulnerabilities that may arise from overlapping exposures and concentrated positions.

Adjusting for Concentration

This is not an argument against equity or index investing but a call to recognize the evolving market structure and adjust risk oversight accordingly. Effective diversification requires more than sector allocation or benchmark tracking, especially as passive strategies can allow this risk to persist.

Concentration risk is structural and visible. Portfolios relying on outdated risk frameworks may find their diversification less effective during turbulent market conditions. Recognizing and adjusting for concentrated exposures is crucial to maintaining robust diversification and ensuring long-term resilience.