The S&P 500 Isn’t as Diversified as You Think

For decades, the S&P 500 has been viewed as the cornerstone of a well-diversified investment portfolio. With exposure to 500 of the largest U.S. companies across multiple industries, many investors assume it offers broad, balanced market exposure. Today, however, that assumption deserves closer scrutiny.

The modern S&P 500 is far more concentrated than most investors realize—particularly in technology and technology-adjacent companies. This concentration materially changes the risk profile of portfolios that rely heavily on a single index.

What Concentration Risk Really Means

The S&P 500 is a market-cap-weighted index, meaning companies with the largest market values have the greatest influence on performance. As a result, when a small group of companies grows exceptionally large, they begin to dominate index returns.

At present, a handful of mega-cap technology companies represent an outsized portion of the index’s total value. The top 10 holdings alone account for roughly one-third of the entire S&P 500. Several of these companies fall squarely within the technology sector or derive much of their valuation from technology-driven growth themes such as artificial intelligence, cloud computing, and digital advertising.

In practical terms, this means that owning an S&P 500 fund today is no longer a neutral bet on the U.S. economy—it is a significant bet on large-cap technology.

Technology’s Expanding Influence

Technology companies have earned their dominant position through strong earnings growth, scalable business models, and high margins. These are real advantages, not speculation. However, concentration creates a different kind of risk: dependency.

When index performance becomes heavily reliant on one sector, or even a few individual companies, portfolio outcomes become increasingly sensitive to:

Regulatory changes
Valuation compression
Shifts in investor sentiment
Slower growth or earnings disappointments

If technology continues to lead, the S&P 500 may perform well. If leadership narrows further or reverses, index-level returns could suffer—even if many other companies are performing reasonably well.

Lessons from History

Market concentration is not new. The late 1990s technology boom offers a useful comparison. At that time, technology stocks also dominated index returns, and the S&P 500 appeared strong on the surface. Beneath the headline numbers, however, many companies were already struggling.

When leadership reversed in the early 2000s, the S&P 500 experienced a prolonged period of underperformance, despite the broader economy continuing to grow. The lesson is not that technology is “bad,” but that narrow leadership increases downside risk.

The Illusion of Diversification

One of the more subtle risks of today’s environment is the illusion of diversification. Investors may believe they are diversified because they own 500 stocks, yet returns are increasingly driven by a small subset of names within a single sector.

This can lead to:

Higher volatility than expected
Greater drawdowns during sector-specific corrections
Portfolios that behave differently than long-term assumptions suggest

In some years, an equal-weight version of the S&P 500—where each company contributes the same weight—has produced meaningfully different results than the traditional market-cap-weighted index. This highlights just how concentrated returns have become.

What This Means for Investors

Technology concentration does not mean investors should avoid the S&P 500 altogether. It remains a highly efficient, low-cost way to gain exposure to U.S. equities. However, it does mean investors should be more intentional about how much of their portfolio relies on it.

Key considerations include:

Are you comfortable with a large portion of your equity exposure tied to technology performance?
Do your risk assumptions still hold if technology underperforms?
Are other parts of your portfolio truly diversifying this exposure?

Managing Concentration Risk

There are several ways investors can address concentration risk without abandoning core equity exposure:

Complementing the S&P 500 with equal-weight strategies
Adding exposure to international equities, where sector leadership differs
Incorporating small- and mid-cap stocks, which are less technology-dominated
Balancing growth-oriented equities with value, real assets, or fixed income

The goal is not to predict when technology leadership will change, but to ensure portfolios are resilient when it does.

Final Thoughts

The S&P 500 remains a powerful investment tool—but it is not the same index it was 10, 20, or 30 years ago. Today’s version carries a meaningful concentration in technology that investors should understand and actively manage.

True diversification is not about the number of holdings. It is about how portfolios behave across different market environments. In an era of narrow leadership and technology dominance, that distinction matters more than ever.

By James Blue, Fee-Only Advisor | Blue Advisors

James Blue is the founder of Blue Advisors, a fee-only financial planning and investment management firm based in Columbus, Ohio.

This content is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. The views expressed are those of the author as of the date published and are subject to change without notice. Blue Advisors is a fee-only registered investment advisory firm. Advisory services are offered only pursuant to a written advisory agreement and to clients in the State of Ohio, the Commonwealth of Pennsylvania, and other jurisdictions where Blue Advisors is properly registered or exempt from registration. Past performance is not indicative of future results. Readers should consult with their financial advisor, tax professional, or attorney before making financial decisions.