A bet on the S&P 500 Index was intended to be a bet on the U.S. stock market. But now, roughly 41 cents of every dollar invested in the large-cap index goes to just 10 stocks.
More surprisingly, even money outside the stock market isn’t providing the same diversification it once did.
The myth of diversification
According to data from Citadel Securities, 8 cents of every $1 invested in the S&P 500 goes toward Nvidia, 7 cents toward Apple, 6 cents each to Microsoft and Alphabet, and 4 cents to Amazon.
The next five mega-cap names, Broadcom, Meta Platforms, Tesla, Micron, and AMD, represent another 10 cents combined.
The top 10 stocks now account for nearly twice the allocation of 402 other companies in the index, which together account for just 23 cents of every $1.
According to S&P Global, the 10 largest companies in the S&P 500 now have their greatest weight in the index since the mid-1960s.
The diversification problem goes beyond stocks
The concentration problem has made the traditional 60/40 portfolio less reliable, according to BlackRock.
Stocks have become more concentrated, while bonds have become a less reliable hedge. Since 2020, bonds have declined in 17 of the 19 months when stocks fell by at least 2%.
This poor track record is one reason BlackRock says investors are looking beyond the traditional 60/40 portfolio for diversification, including alternative assets that can move independently.
Bottom line: Passive investors may need to reconsider what counts as a "diversified" portfolio. If stocks are increasingly driven by the same handful of companies and bonds aren’t consistently offsetting losses, the traditional mix leaves less room for error.
