Top Ten Stocks Make Up 38% of S&P 500; Three ETFs for Diversification

The S&P 500 index, which comprises 500 leading U.S. companies, is increasingly dominated by a select few. Currently, the ten largest companies represent approximately 38% of the index, significantly impacting the diversification that investors expect from such a fund. Major players like Nvidia, Apple, Alphabet, Microsoft, Amazon, Broadcom, and Meta are driving this concentration. While this trend has benefited investors during a period of strong performance from mega-cap technology stocks, it raises concerns about the lack of diversification for those investing in S&P 500 funds.

For investors wary of having nearly 40% of their investments tied to just ten companies, there are several ETFs that can help spread risk. The Invesco S&P 500 Equal Weight ETF (RSP) offers a straightforward solution by equally weighting all companies in the index. This means that instead of having a few companies dominate the returns, every company has a similar allocation, which is rebalanced quarterly. As a result, RSP can benefit from rallies in sectors outside of the mega-cap tech space, although it may lag behind during periods when those large companies are performing exceptionally well.

Through July 31, 2026, RSP has shown a return of approximately 13.2%, outperforming the S&P 500's 9.4% gain in the same timeframe. With a low expense ratio of 0.20%, it remains an attractive option for investors seeking large-cap exposure without the heavy reliance on a few dominant firms.

The Invesco S&P MidCap Quality ETF (XMHQ) takes a different approach by focusing on about 80 companies from the S&P MidCap 400, selected based on strong quality characteristics such as profitability and balance-sheet strength. This strategy aims to avoid the pitfalls of investing in smaller companies that may have weaker financials. XMHQ has returned around 12.5% through July 31, 2026, and charges a management fee of 0.25%.

Another option is the Avantis U.S. Small Cap Value ETF (AVUV), which actively targets small-cap companies with lower valuations and stronger profitability. While this ETF can introduce more volatility due to the nature of small-cap stocks, it has demonstrated the importance of diversification, achieving a NAV total return of 23.61% through July 31, 2026.

The rationale for considering RSP, XMHQ, and AVUV is not to suggest that the mega-cap stocks are poor investments. Instead, it highlights the necessity of diversification in a portfolio. By utilizing these ETFs alongside traditional S&P 500 funds, investors can reduce their exposure to the concentration of a few large companies and achieve a more balanced investment strategy.