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.

In January 2025, the top 10 companies accounted for 38% of the index, and 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

More notably, most of these top firms are tech-related,³ with the “Magnificent 7” accounting for roughly 34% of the S&P 500.³ To put it in perspective, Nvidia alone carries nearly as much weight as the bottom 250 companies combined.  

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.

That imbalance is also evident in returns. Year-to-date through August, the “Magnificent 7” have returned over 52%, while the equal-weighted S&P 500 has gained just 4.2%. Though the headline index remains positive, market breadth paints a more complex picture—masking how narrow leadership is driving most of the gains.

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. When prices plunged, energy issuers faced widespread downgrades and defaults, dragging down the index. Active managers were able to reduce exposure and mitigate losses while passive strategies mirrored the steep declines. This episode underscores how sector concentration can heighten 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 the 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 offers cost efficiency but not necessarily 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.

Investors need to actively review their portfolio exposures, both across sectors and within the largest holdings, and understand how these concentrations interact with other assets in their portfolios. 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 investing can allow concentration risk to persist.

Investors have various ways to adjust their portfolios to ease concentration risk without throwing their goals off track. Concentration risk is structural and visible, and portfolios relying on outdated diversification may find their protections were only apparent during market stress.