Index investing markets itself on diversification: five hundred companies, every sector, the whole U.S. economy in one ticker. That description was accurate for most of the index’s history. It is no longer accurate. As of the mid-2020s, the top ten names in the S&P 500 account for roughly 35% of the index by weight — a concentration not seen since the late 1960s — and the top five account for more than a quarter. Those names are mostly tied to a single capital-expenditure theme: the AI infrastructure build-out. When you buy the index today, you are buying a concentrated bet on a handful of mega-caps and on the durability of one CapEx cycle, dressed up as broad exposure.
This matters in two ways the brochure does not advertise. First, the headline earnings growth of the index in recent years has come overwhelmingly from a handful of names; the median company in the index has grown earnings far more slowly. Strip out the top ten and the trailing growth story is unremarkable. Second, because cap-weighting is momentum-driven, the names that dominate today are the names whose valuations have already been bid up the most — the index mechanically overweights what is already expensive. That is a feature, not a bug, but its consequence in a concentrated market is that you are systematically buying more of whatever just outperformed.
The fix is not to abandon index investing. It is to recognize that “the S&P 500” and “a diversified portfolio” are no longer synonyms. Practical hedges against the concentration: hold a meaningful slug in an equal-weighted S&P 500 fund ( Invesco S&P 500 Equal Weight ETF (RSP) is the standard vehicle, with a sub-25-bp expense ratio) so each name carries roughly the same weight; add small-cap and international exposure to dilute the mega-cap tilt; and tilt toward value or quality factors, which by construction underweight whatever the cap-weighted index is currently in love with. If a single CapEx cycle is doing most of the work in the headline index, your portfolio should not be entirely along for that ride.