From a young age, we’re taught to not put all of our eggs in one basket because it’s risky. And for decades, investors had a simple fix: They could diversify their portfolios via low-cost index funds that spread dollars across hundreds or thousands of individual stocks spanning sectors, industries and themes.

Today, it’s not so straightforward.

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Investors are piling money into exchange-traded funds (ETFs) at a record pace to gain exposure to baskets of stocks rather than investing in individual companies. But with the explosive growth of tech companies — including the Magnificent Seven, AI hyperscalers and semiconductor makers — the index funds providing that exposure are increasingly top-heavy.

The Vanguard S&P 500 ETF (VOO), the world’s largest ETF with just shy of $1 trillion in assets under management, is famous for its perceived diversification while charging a low expense ratio of 0.03%. However, the 10 largest companies in its holdings now account for 36% of its portfolio.

For tech-focused indices, it’s even worse. The 10 largest companies in the Nasdaq-100, which holds the 100 largest non-financial companies listed on the Nasdaq exchange, account for 46% of its portfolio.

That degree of concentration risk is hard to overlook. For every $1 invested into a fund that tracks the Nasdaq-100, 46 cents are allocated to just 10 stocks. The other 54 cents are spread across the remaining 90 stocks.

“It is a problem,” says Gina Martin Adams, chief market strategist at HB Wealth. “And I think it is a consequence of the economy as much as it is the market.”

How economic cycles fuel stock market concentration

Coming out of 2022’s economic slowdown, AI has been the principal driver behind companies increasing their outlays. That has contributed to once-in-a-generation gains for the stock market.

Semiconductor giant Nvidia is the perfect example. The world’s largest publicly traded company by market cap saw its shares gain 917% over the past five years. It has grown so large that it alone now accounts for 7.57% of the S&P 500.

Adams says that the resulting concentration — both in the market and economy — can resolve itself in one of two ways: by shrinking its share through losses, or by revealing opportunities in the rest of the economy.

“Ultimately, [AI’s gains] most likely start to translate into better economic outcomes for all industries,” she says. “But there is concentration risk, and that’s a concern if we can’t generate positive economic momentum outside of AI.”

Recently, that has been materializing. In a July 17 research note, the Federal Reserve said that evidence points to a U.S. economy that is reorganizing around AI, “with real effects concentrated on certain areas of the economy,” adding that high levels of AI investment are preceding measurable productivity gains.

Still, Adams says laggards — particularly the housing market and the auto industry — have stagnated, magnifying AI’s performance.

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Hoping for the best, preparing (your portfolio) for the worst

While AI remains the largest driver of both the economy and stock market, the 493 companies in the S&P 500 beyond the Magnificent Seven are forecast for around 20% earnings growth in the second half of the year, according to Adams. Tech companies are no longer the sole beneficiary of AI.

“Maybe it’s AI feeding through to economic optimism, or maybe it’s new businesses utilizing AI or efficiencies that are emerging,” she says. “It’s resulting in real-time improvements outside of the AI spenders.”

But the hyperscalers responsible for the market’s historic concentration face another risk factor: weak consumer sentiment. Although the majority of the Magnificent Seven remain focused on AI buildout, they still maintain significant consumer-facing businesses. Amazon, Apple, Meta and Microsoft generate sizable revenue from e-commerce, smartphones, wearable tech and gaming consoles.

Adams says that consumers — burdened by high inflation, limited job growth and negative wage growth — could ultimately reduce their spending, thereby presenting a risk to those tech companies’ growth.

She stops short of saying that index fund investing is no longer a means of providing diversification. Rather, she highlights how investors who are concerned about concentration risk can turn to other indices.

“The Russell 3000, for example, offers a slightly better diversification than the S&P 500,” she says, adding funds tracking that index can provide investors with exposure to the entire U.S. stock market. “You’re still getting the concentration risk, but not nearly as profoundly.”

It’s a numbers game. For example, total market index funds like the Vanguard Total Stock Market Index Fund ETF (VTI) provide access to around 3,500 stocks. Nvidia still has a 6.32% weighting in the VTI, but the ETF also includes small- and micro-cap companies, which have outperformed the weighted S&P 500 thus far in 2026.

Alternatively, equal-weight ETFs like the Invesco Equal Weight S&P 500 Index ETF (RSP) protect investors from outsized losses when highly volatile market cap-weighted tech dominators undergo pullbacks and corrections. That’s because unlike their weighted counterparts, equal-weight ETFs provide the same degree of exposure to Nvidia as they do the smallest company in the index.

Importantly, these types of funds allow investors to tilt their portfolios more conservatively without giving up entirely on growth.

“Adding positions in value or small caps … allows you to capitalize on potential improvements beyond technology,” Adams says. “But buying the S&P 500 is no longer a clean, diversified approach to equity investing.”

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