A historic moment for the S&P 500 calls for investors’ attention
Diversification is a core tenet of prudent investing. But thanks to a historic market development, some investors who think they’re well-diversified may want to give their portfolio a closer look.
The reason: For the first time ever, the S&P 500—the well-known index of 500 large-cap stocks from 11 sectors that many investors use as a gauge for the broad stock market’s health—is no longer legally considered to be diversified according to rules established in the Investment Company Act of 1940, which regulates registered investment companies such as mutual funds and ETFs.
Here’s the test: Look at all of the stocks in any particular mutual fund or ETF. Find all those that have a weight of 5% or above and sum them up. If that total is above 25%, the investment can no longer be called “diversified.
As of last week, the value (or market cap) of each of the S&P 500’s top-four stocks (Nvidia, Apple, Microsoft, and Alphabet) now exceeds 5% of the index’s total market cap. The sum of those four names is about 27% (see chart), leading to a failure of the diversification classification.
The S&P 500 Is Now Undiversified
Bloomberg, calculations by Horizon, data as of 10/31/2025. This is not a recommendation to buy or sell any security. It is not possible to invest directly in an index.
Generally, insufficient diversification poses significant risks for investors. For example, returns can be disproportionately hurt by the poor performance of the biggest stocks in a portfolio with little to no diversification. In this case, a big, sudden decline in any one of these four tech stocks (or other Mag 7 stocks) could cause the entire S&P 500 index to drop sharply. That’s been true for a while now, but the risk has now risen to a new level.
Does all this mean investors should avoid the S&P 500? Of course not. The companies in that index include some of the most successful businesses in the world. Instead, keep these two key points in mind:
- When market performance is driven by a small handful of stocks, many diversified strategies that hold a broad array of stocks simply cannot keep up, nor are they designed to.
- Understand what you actually own when you invest in a fund. Then consider allocating other assets to strategies that aren’t as heavily concentrated—thereby ensuring greater diversification and helping you create a robust portfolio with a good balance of risk and return for your goals-based financial plan.