Not too long ago, investing in an S&P 500 fund seemed like the best use of one’s income. Five hundred American businesses on a single ticket—the kind of choice that inspired Jack Bogle to start a movement. When you walk into any 401(k) enrollment meeting across the nation, someone will still be pointing to a graph showing the index steadily rising to the right. What lies beneath the line is the issue.
Approximately thirty cents of every dollar invested in a typical S&P 500 fund today is held by just five companies. Amazon, Apple, Microsoft, Nvidia, and Alphabet. Depending on the week you look, the top ten make up about 40% of the total index, which is nearly twice as much as they did in 2015. There hasn’t been a weighting like that since the dot-com era, and even that comparison seems charitable. The leading brands in 2000 were dispersed throughout the telecom, hardware, software, and pharmaceutical industries. Artificial intelligence is the overarching theme that unites today’s five.
Since the fund’s name hasn’t changed, it’s simple to overlook this. Nothing has changed on the ticker. The ratio of expenses is still low. However, the engine has been discreetly rebuilt. During a rapid 28-session rally this spring, Nomura discovered that ten stocks were responsible for almost 70% of the index’s gains. For at least that month, the remaining 490 people were just spectators.
When you speak with a financial advisor, you’ll hear the same thing: people are unaware of their true assets. In the words of an Atlanta planner, “set it and forget it” is no longer relevant. Seeing a generation of retirement savers instructed to do one thing for thirty years only to discover that it has gradually changed into something else is almost unsettling.
Many investors don’t think this is a problem at all. They see a long runway when they look at the AI build-out, including the data centers being built in the Arizona desert, the new factories in central Ohio, and the GPU orders that are backlogged into the upcoming fiscal year. It’s a fourth industrial revolution, according to Wedbush analyst Dan Ives, who hardly ever saw a tech rally he didn’t like. Perhaps he is correct. He has previously been correct.
However, there’s a feeling that something more subdued is taking place here as well. Due to the market-cap weighting of the index, the largest companies receive the majority of the passive money that continues to flow in. The largest businesses continue to grow. They gain weight. More cash comes in. On the way up, it functions flawlessly. In the opposite direction, it is typically less forgiving.
None of this is academic for someone who is five years away from retirement. When the runway gets shorter, the recovery math gets more difficult. Equal-weight funds like Invesco’s RSP, international exposure, small caps, a slice of value — these aren’t exciting ideas. For years, they have performed poorly. They may underperform for longer. However, they do one helpful thing: they ensure that your savings don’t rely on the same five names that drove the previous decade.
It’s difficult to ignore how drastically the conversation has changed. Diversification used to be a default. You have to ask for it now.
