By Lesa 
For years, index funds and ETFs were hailed as the ultimate passive investment strategy. But in 2025, a new concern is creeping into the conversation: concentration risk. Despite holding hundreds of stocks, many of the most popular ETFs are now heavily dominated by just a handful of companies.
How diversified is your portfolio, really?
If you’re invested in broad-market funds like SPY, QQQ, or VTI, it’s time to take a closer look at what you actually own, and whether your exposure is as balanced as you think.
What Is Concentration Risk?
Concentration risk occurs when a portfolio or fund becomes overly reliant on the performance of a small number of assets. This is especially relevant in ETFs that track market-cap-weighted indices, where a few mega-cap stocks can dominate overall returns.
If Apple, Microsoft, NVIDIA, Amazon, and Alphabet make up 40% of the NASDAQ 100, and they drop in tandem, the entire index suffers—even if the other 95 companies are flat or up.
Similarly, in the S&P 500, these same five companies now account for nearly a third of total returns. In short: your “diversified” fund might be behaving more like a tech-heavy growth portfolio than a balanced basket of U.S. businesses.
What’s Driving the Concentration Spike in 2025?
Three factors explain why concentration risk is hitting new highs:
1. Market Cap Weighting
Most major ETFs and indexes—including SPY (S&P 500), VOO (Vanguard S&P 500), QQQ (NASDAQ 100), and VTI (total market)—are market-cap weighted. That means the biggest companies get the biggest slice.
As tech giants have grown exponentially, so has their influence on index performance.
Example:
- Apple’s market cap hit $3.5 trillionin early 2025
- NVIDIA’s soared past $2 trillion thanks to AI chip demand
- Microsoft, Amazon, and Alphabet remain dominant
2. Outperformance of a Few Mega-Caps
AI, cloud computing, and software-as-a-service (SaaS) have driven massive gains for a small group of companies—especially NVIDIA, Microsoft, Meta, and Amazon.
While these companies earned their dominance through strong fundamentals, it creates a feedback loop: their outperformance increases their weighting, which increases their impact.
3. Investor Inflows Into Passive Funds
Record-breaking flows into passive funds (like index ETFs) mean that more money gets allocated automatically into these large companies, reinforcing their dominance.
Vanguard alone added over $350 billion in net inflows in 2024—most of it into total market or S&P 500 funds.
Why Concentration Risk Matters
It Undermines Diversification
The foundational appeal of index funds is diversification—spreading your bets across hundreds of companies and sectors to reduce individual risk. But if five companies are driving nearly half of the gains (or losses), you’re no longer getting true diversification.
It Increases Downside Risk During Corrections
When markets turn volatile, mega-cap tech stocks can fall in tandem. If Apple, Microsoft, and NVIDIA decline at once, the impact on your ETF is substantial—even if smaller holdings are stable or rising.
This correlation risk was evident during the 2022 and 2023 corrections, where tech-heavy funds saw drawdowns of 30–40%, largely driven by weakness in just a few names.
It Distorts Your Exposure
Investors often assume that holding a total market ETF means they’re capturing small caps, value stocks, and sector breadth. But the current reality is that these segments are underweighted, and large-cap growth dominates the exposure and performance.
How to Identify ETF Concentration in Your Portfolio
Start by looking beyond the name of your ETF and digging into:
- Top holdings and their combined weight
- Sector exposure—especially if one sector dominates
- Rebalancing frequency (some ETFs rebalance quarterly, others only annually)
- Whether it’s market-cap, equal-weight, or fundamentally weighted
Even a total U.S. market ETF may be giving you limited exposure to small-cap or value segments due to the sheer size of the top 10 companies.
What Can You Do About It?
You don’t have to ditch ETFs altogether—but you can be more intentional with your allocation strategy.
1. Add Equal-Weight ETFs
Equal-weighted funds give every company the same influence, rather than skewing toward the biggest players. That means a more balanced performance profile across sectors.
Example: RSP (S&P 500 Equal Weight ETF). These ETFs tend to outperform in market conditions where small- and mid-cap stocks rally
2. Tilt Toward Small-Cap and Value Stocks
Consider adding dedicated exposure to small-cap or value-focused ETFs like:
- VBR – Vanguard Small-Cap Value
- IJR – iShares Core S&P Small-Cap
- AVUV – Avantis U.S. Small Cap Value
These can help offset the tech-heavy bias of broad-market funds and tap into less correlated return streams.
3. Diversify Internationally
U.S. mega-cap tech has been the dominant story, but there’s a world of opportunities beyond Silicon Valley. Look at developed markets (e.g., VXUS) and emerging markets (e.g., VWO) International stocks often offer better valuations and different sector exposures
4. Monitor and Rebalance
Set a cadence to regularly review your portfolio’s actual exposures—especially if you hold multiple ETFs with overlapping top holdings.
Ask:
- Are you overexposed to a few companies across funds?
- Do you still have adequate exposure to other asset classes and sectors?
- Are you too reliant on momentum or performance-chasing?
Final Thoughts: Diversification Isn’t Automatic Anymore
Index funds are still powerful tools—but in 2025, they require more scrutiny. The concentration of returns among a few massive companies doesn’t invalidate passive investing—but it does highlight the need for better oversight.
You may think you own a broad slice of the market. But in reality, your financial future might be tethered to the fate of just a few tech giants. That’s not a reason to panic. It’s a reason to plan. Understand what you hold. Adjust accordingly. And remember that real diversification is intentional—not assumed.