S&P 500 concentration: the scare story that's costing investors money
- Robin Powell
- 1 hour ago
- 9 min read
The fund industry says the S&P 500 has become dangerously concentrated, and that you need to act. New research covering nearly a century of US market data suggests the opposite: acting on this fear has historically destroyed wealth.
Say you go to the doctor for a routine check-up. A scan picks up something unusual. A lump, an odd reading, something that wasn't there before. Your doctor looks concerned. He orders more tests, then sits you down and explains that you need aggressive intervention. Surgery, perhaps. Expensive medication. You'll need to come back regularly. It won't be cheap, but the alternative is far worse.
You're worried, and you're trusting. Why wouldn't you be? This person went to medical school.
But you get a second opinion, and the specialist isn't alarmed at all. The symptom is real — no one's denying that. But it's a normal feature of how your body works. It doesn't need treating. And the proposed cure? It carries side effects that would leave you worse off than doing nothing.
Something very like this is happening to millions of investors right now. The "symptom" is S&P 500 concentration: a small number of very large companies accounting for a growing share of the index. It's real, it's measurable, and it looks dramatic on a chart. The "doctors" are fund managers, financial advisers, and asset management firms, all diagnosing a dangerous condition and prescribing an expensive remedy — active management, tactical allocation, alternative investments.
A major new study suggests the diagnosis is wrong. And the cure makes things worse.
The S&P 500 really is concentrated — that much is true
Let's be honest about the facts. The S&P 500 is concentrated. Nobody credible disputes that.
In an October 2025 working paper, The Fallacy of Concentration, Mark Kritzman and David Turkington set out to test whether this concentration matters. Kritzman is CEO of Windham Capital Management and a senior lecturer at MIT's Sloan School of Management. Turkington is senior managing director and head of State Street Associates. Their paper hasn't yet been published in a peer-reviewed journal, but the analysis is thorough and the data spans nearly a century.
They measure concentration using the "effective number of stocks," a metric that captures how evenly weights are distributed across the index. A lower number means greater concentration. By this measure, the S&P 500 is near its most concentrated level in 27 years, driven by the dominance of a few sectors and, within those sectors, a few very large companies.
But here's what the headlines miss. Extend the analysis back to 1926, and today's concentration closely matches historical lows. It's elevated. It isn't unprecedented.
The symptom is real. What matters is what it means.
The diagnosis the fund industry is selling
"Investors need to be wary of messages about markets that are really about marketing." — Jason Zweig
So the concentration is real. What follows from that?
If you listen to parts of the fund industry, quite a lot. The S&P 500 is "broken." It's "not safe." It presents "elevated risks" that demand action. And the prescribed action, conveniently, always involves buying something more expensive: actively managed funds, tactical allocation strategies, private equity.
These products have one thing in common. They all charge significantly higher fees than a simple index fund.
Pause on that. When a doctor profits from the procedure he recommends, we recognise the conflict of interest immediately. We'd want a second opinion. Yet when a fund manager whose livelihood depends on persuading you not to index tells you that indexing is dangerous, many investors accept it without question.
As Jason Zweig put it in the Wall Street Journal, "Investors need to be wary of messages about markets that are really about marketing."
Tim Atwill, a former senior analyst at Russell Investments and ex-head of investment strategy at Parametric Portfolio Associates, is blunter. "The investment community has always agreed on all these tribal 'truths' that have no basis in data," he said in the same piece.
So what does the data say?
A second opinion backed by 90 years of data
If S&P 500 concentration really does make the market riskier, there's an obvious test: would investors have been better off reducing their equity exposure when concentration rose and increasing it when it fell?
Kritzman and Turkington ran exactly this experiment, using US market data from 1926 to 2025. They compared a constant allocation against a dynamic one that shifted away from equities whenever concentration increased. Both maintained the same average equity exposure of 67.8% over the full period. Only the timing differed.
The results weren't close. The dynamic strategy earned an average excess return of 4.7% per year. The constant strategy earned 5.6%. That 0.9 percentage point gap sounds modest in a single year, but compounded over nearly a century it was devastating. Buy-and-hold generated more than twice as much terminal wealth.
The dynamic strategy didn't just deliver lower returns, either. It also produced higher risk — a standard deviation of 12.1% compared to 10.7%. Less return, more volatility. The worst of both worlds.
"Taking risk off the table every time the market gets more concentrated would have been very harmful historically," Kritzman told the Wall Street Journal. "It may help you avoid some fraction of the selloffs, but you incur a huge opportunity cost in losing out on the run-ups."
"Taking risk off the table every time the market gets more concentrated would have been very harmful historically." — Mark Kritzman
More formal testing reinforced the point. Panel regressions across S&P 500 sectors from 1998 to 2025 found that concentration explained none of the variation in returns, volatility, downside volatility, or maximum drawdown. Every t-statistic was insignificant.
One more finding deserves attention. When the authors grouped S&P 500 stocks into quintiles of equal aggregate market capitalisation, the largest quintile (averaging eight stocks) showed the same risk profile as the smallest (averaging 328 stocks). Eight companies. Same risk as 328.
That's the second opinion. The symptom doesn't require intervention.
Why the biggest companies aren't the biggest risks
"A company is a single legal unit. And a company is a single accounting unit. But a company is not a single economic unit." — Kritzman and Turkington (2025)
So S&P 500 concentration doesn't increase risk. But why not? Kritzman and Turkington offer three explanations.
Start with the most intuitive. Large companies aren't single bets. Apple sells hardware, software, and services across dozens of countries. Amazon operates in retail, cloud computing, advertising, and logistics. These firms have deeper access to capital, stronger governance, and far greater flexibility to absorb shocks than smaller rivals. Owning eight of them may, in economic terms, give you broader exposure than owning 328 smaller, more specialised businesses.
Then there's the structural explanation. Concentration in a market index isn't a distortion — it's a natural consequence of how markets work. Growth compounds. Companies that succeed attract more capital, which funds more growth, which attracts more capital. Research by Goldberg, Madhavan, Selwitz, and Shkolnik (2023) in the Journal of Investment Management confirms that power law dynamics make some degree of concentration inevitable in capitalisation-weighted indices. It's a feature, not a bug.
Finally, theory points the same way. Both the Efficient Market Hypothesis and the Capital Asset Pricing Model imply that investors should hold the market portfolio, full stop. If prices reflect available information, the market's weight distribution is its best estimate of value. Second-guessing that requires believing you know something the collective market doesn't.
The paper's closing insight ties it together: "A company is a single legal unit. And a company is a single accounting unit. But a company is not a single economic unit. Therefore, company concentration does not equate to economic concentration."
Same scare, different decade
The concentration alarm isn't the first attack on index funds. It's the latest.
As Jason Zweig documented in the Wall Street Journal, "For as long as index funds have existed, they've been under attack from competitors flinging one flimsy pretext after another." In the 1970s and 80s, critics dismissed indexing as "settling for average." Index funds went on to outperform the majority of active funds. In the 1990s, brokers warned they were "tax bombs." They weren't. Then came the argument that passive investing couldn't protect against market crashes. It couldn't. But neither could active management.
More recently, stock pickers claimed a unique ability to select socially responsible companies, something index funds supposedly couldn't do. That didn't hold up either.
Now it's S&P 500 concentration. And the timing is revealing. Five of the seven Magnificent Seven stocks failed to beat the index in 2025, and by early 2026 all seven were trailing it. The very stocks that were supposed to make the index a liability were dragging it down.
"Active managers are very good narrative creators," Atwill noted in the same Journal piece. "The industry has had a lot of time to practice all these effective narratives to make people believe the managers possess this magic."
The narrative shifts. The sales pitch stays the same.
Cap-weighting isn't perfect — but that's beside the point
None of this means market-cap weighting is flawless. By definition, it gives more weight to stocks that have risen in price and less to those that have fallen. There are legitimate, academically supported reasons to tilt a portfolio toward value, smaller companies, or profitability factors.
But that's a completely different argument from the one the fund industry is making.
Systematic factor tilts are rules-based, low-cost, and grounded in decades of peer-reviewed research. They're a refinement of passive investing, not a rejection of it. Paying an active manager 1% or more a year to "protect" you from concentration is the same old pitch in new packaging.
Ask whether the proposed alternative is likely to leave you better off. Almost always, it won't.
What this means for your portfolio
Don't reduce your equity exposure because of S&P 500 concentration. Nearly a century of data shows that de-risking in response to concentration has destroyed wealth, not protected it.
Remember what you own. A global index fund spreads your money across thousands of companies in dozens of countries. Even a pure S&P 500 fund gives you exposure to firms that collectively operate in virtually every economy and industry on earth. That's diversification, whatever the top-ten list looks like.
Think about your whole portfolio, too. Bonds, property, international equities, and cash all reduce your dependence on any single market segment. Concentration within one index matters far less when that index sits inside a broader allocation.
If an adviser suggests active funds or alternatives to "solve" concentration risk, ask two questions. What evidence supports this recommendation? And who benefits from it?
If factor tilts appeal to you, pursue them through low-cost, systematic funds. That's evidence-based portfolio construction. It doesn't require a stock picker.
Before agreeing to any invasive financial procedure, get a second opinion. Preferably one backed by data rather than a sales target.
The verdict
Our patient got lucky. They sought another view before agreeing to surgery, and the specialist told them what the data showed: the symptom was real but benign, and the proposed cure would cause more harm than the condition it claimed to address.
Kritzman and Turkington have done the same for investors. Yes, the S&P 500 is concentrated. No, that doesn't make it riskier. A company is a single legal unit and a single accounting unit, but it is not a single economic unit. The biggest companies in the index carry the world's economies inside them. Company concentration does not equate to economic concentration.
The greatest danger to your portfolio isn't that a handful of firms have grown large. It's that someone with a fee to earn might convince you to do something about it.
Next time you're told your index fund is broken, ask a simple question: who benefits from that diagnosis?
Resources
Goldberg, L., Madhavan, A., Selwitz, H., & Shkolnik, A. (2023). Is index concentration an inevitable consequence of market capitalization-weighting? Journal of Investment Management, 21(2).
Kritzman, M. & Turkington, D. (2025). The fallacy of concentration. Working paper.
Finding a financial adviser shouldn't feel like a leap of faith
The professionals in our Find an adviser directory have publicly committed to evidence-based principles — no stock-picking, no market-timing, no hidden agendas. See who's near you and start a conversation.
For advisers: Need help with client content? Email Robin or connect on LinkedIn to discuss our content marketing services.