MarketWatch columnist Brett Arends argues the S&P 500 is far less diversified than most investors assume, because AI and technology stocks dominate its top holdings. He points to the S&P 400 midcap index and equal-weighted funds as more spread-out alternatives.
After Nvidia plunged 9% on Thursday, MarketWatch columnist Brett Arends warned that many Americans hold far more AI exposure in their retirement funds than they realize. In his opinion piece, he says the S&P 500 is not as diversified as it looks.
Ten stocks carry 40% of the index
Arends says the 10 biggest stocks account for 40% of the S&P 500. An investor with $10,000 in an S&P 500 index fund therefore has $4,000 riding on 10 stocks, he writes. Most of them are AI or technology names such as Nvidia, Meta, Broadcom, Alphabet and Tesla.
A decade ago, the top 10 accounted for just 17%, according to Arends. Nvidia alone makes up 7.3% of the index, more than the smallest 200 stocks combined.
Arends cites research by Scott Rubner, head of equities at Citadel Securities. According to Rubner, "Semiconductor stocks now represent nearly one-fifth of the S&P 500, the highest share on record."
A total-market fund does not fix it
Switching to a total U.S. stock-market fund does not solve the problem, Arends says. Vanguard's Total U.S. Stock Market ETF says it spreads money across 3,500 U.S. stocks, yet 36% goes into the same top 10.
He stresses that this is not a criticism of the funds, which do what they are designed to do. His point is that many investors never intended the outcome.
Equal-weighted and midcap alternatives
Arends names the Invesco S&P 500 Equal Weight ETF and the iShares MSCI USA Equal Weighted ETF as options that spread money equally across stocks. He calls them, by definition, much more diversified.
He also points to the S&P 400 midcap index. Its stocks trade at 14 times forecast earnings, against 18 times for the S&P 500, and its 10 biggest companies make up 6.7% of the index, or $670 of a hypothetical $10,000. The trade-off, he notes, is that midsize and smaller company stocks are usually more volatile than large caps in the short term.
Arends says no one can know for certain whether the AI boom will crash. He argues investors should at least know what bet they are taking.
Source: MarketWatch
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