Key Points
-
The current bull market has been heavily driven by just a handful of megacap tech stocks.
-
Those stocks appear among the top 10 holdings of many U.S. stock ETFs today.
-
It’s more important than ever to look under the hood to understand what you own.
Many investors think that owning more stocks or exchange-traded funds (ETFs) automatically means portfolio diversification.
It may. But it depends entirely on what you’re buying. Unfortunately, today’s U.S. stock market is as top-heavy and concentrated as it’s ever been. Because of that, a lot of portfolios own multiple funds that essentially look the same.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again.In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
The Vanguard S&P 500 ETF(NYSEMKT: VOO), for example, is a perfectly acceptable choice for the core of your portfolio. But it’s not perfect. It’s currently got 38% of its assets invested in tech stocks and 37% of its assets invested in the index’s top 10 holdings. Even in a fund that owns hundreds of stocks, its performance depends heavily on fewer than 10 companies.
How you choose to build around that core determines whether you’re actually diversifying or just complicating the problem.
Image source: Getty Images.
Additional ETFs might not add much diversification at all
Investors are usually inclined to invest in whatever is performing well at the time. Over the past few years, that means they’ve probably loaded up on funds such as the Vanguard Growth ETF(NYSEMKT: VUG) and the Vanguard Information Technology ETF(NYSEMKT: VGT). But look under the hood of those funds, and you’ll immediately see the problem.
The Vanguard Growth ETF has 80% of its assets invested in tech. Nine of its top 10 holdings are identical to those of the S&P 500(SNPINDEX: ^GSPC). It’s got 63% of its assets in the top 10 holdings.
The Vanguard Information Technology ETF tells a similar story. Its top three holdings — Nvidia(NASDAQ: NVDA), Apple(NASDAQ: AAPL), and Microsoft(NASDAQ: MSFT) — are the same as the S&P 500, but alone account for nearly half of the portfolio.
The commonality among all three ETFs is that they’re incredibly concentrated in just a handful of the same megacap tech stocks. If you buy the Vanguard Growth ETF or the Vanguard Information Technology ETF thinking that you’re diversifying your core S&P 500 position, you’d actually be making your portfolio even more concentrated.
Here’s what I’d pair with the S&P 500 instead
If you want true diversification with U.S. stocks, I’d choose bonds, gold, or maybe international equities.
But if you don’t want to drift too far from what’s currently working with U.S. large caps, take a look at the Invesco S&P 500 Equal Weight ETF(NYSEMKT: RSP). You get the same 500 stocks as the big index, but reallocated in a way that gives you true diversification within this category.
It’s got 9%-plus allocations in five different sectors, including tech, giving it much more balanced exposure to U.S. equities.
None of this is to suggest that you should sell your growth or tech ETFs today. But it’s a good reminder to always look under the hood and understand what you own. Then you can truly protect your portfolio from unusual risks.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 951%* — a market-crushing outperformance compared to 214% for the S&P 500.
They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you joinStock Advisor.
*Stock Advisor returns as of October 10, 2026.
David Dierking has positions in Apple and Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, Vanguard Morningstar Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This article contains syndicated content. We have not reviewed, approved, or endorsed the content, and may receive compensation for placement of the content on this site. For more information please view the Barchart Disclosure Policy here.
