Key insights
- The article highlights that the S&P 500, tracked by the Vanguard S&P 500 ETF (VOO), has become heavily concentrated in technology and growth stocks, with the top 10 holdings comprising nearly 40% of assets. This concentration deviates from the perception of broad diversification, potentially exposing investors to significant risk if these dominant companies underperform. While the ETF has delivered strong returns, its increasing tech and growth bias is a key takeaway for investors.
The S&P 500 (^GSPC 2.64%), despite its diversified simplicity, has become one of the best investments of the past decade. Over the past 10 years, the Vanguard S&P 500 ETF (VOO 2.60%), which tracks the well-known index, has generated a total return of 327%. That's not quite as good as many tech and growth exchange-traded funds (ETFs) over the same period. But a 15.5% average annual return from a diversified basket of large-cap stocks is really good by almost any measure.
Well, diversification is what many investors think they're getting with the S&P 500, at least.
The truth is that the index is as overweight tech today as it's ever been. With a 35% allocation, the S&P 500 looks less like a fully diversified portfolio and more like a tech fund with other sectors sprinkled around the edges.
The concentration problem isn't just limited to the sector level. While the percentage of assets committed to tech is the highest it's been since the launch of the Vanguard S&P 500 ETF in 2011, it's not the only area exerting significant influence.
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The percentage of stocks categorized as growth stocks within this ETF (50% as of late last year) was also at its highest level since inception. The concentration of assets within the top 10 holdings? Also at a since-inception high at nearly 40%.
Investors think they may be getting a broadly diversified portfolio when they invest in the S&P 500. By the number of stocks held within the index, that may be true. But it's also true that an investment in the S&P 500 is largely controlled by a dozen stocks or fewer.
One little-known company, called an "Indispensable Monopoly" owns the technology Nvidia, AMD, and Intel cannot function without. And it is still just a fraction of Nvidia’s size.
We just released a brand-new report with the full story and the company’s name.
There are a couple of ways to address this problem.
If you want to stick exclusively with U.S. large-cap stocks, the Invesco S&P 500 Equal Weight ETF (RSP 1.42%) provides a more diversified mix of sectors. Tech is still the largest sector holding, but only at 19% of the fund. Four other sectors have weightings of 9% or more. It's the same basket of stocks, but much more spread out.
The other thing that's ignored with the S&P 500 is an allocation to small caps and international stocks. As we've seen over the past year or so, these two groups have had their moments that demonstrate why they're so important to a diversified portfolio. They have different exposures and economic influences that can provide true diversification benefits when combined with the S&P 500.
The Vanguard S&P 500 ETF remains a solid investment that can serve as the cornerstone of a portfolio. But it's not perfect, and it can be improved.