The Vanguard S&P 500 ETF's top 10 holdings now make up almost 40% of its total value, the highest concentration since 1965 and well above the dot-com peak of 26%. Nvidia alone accounts for more than 8% of the index, and the last time concentration ran this high, the S&P 500 returned just 1.2% annually for a decade.
The Vanguard 500 ETF (VOO), which tracks the S&P 500 Index, holds so few surprises for most investors that its top 10 holdings comprising almost 40% of its total value marks a level not reached since 1965. That is well above the dot-com era's 26% peak.
Tech names drive the concentration
A decade ago, the S&P 500's 10 largest holdings accounted for only about 17% of the index, a figure now approaching 40%. In 1965, AT&T was the largest holding at over 9%. Now Nvidia leads, accounting for over 8% of the S&P 500 and VOO.
The Magnificent Seven — Nvidia, Amazon, Meta Platforms, Microsoft, Apple, Alphabet, and Tesla — is the biggest driver behind the shift. Over the past five years, the group has gained 133.5% on average, more than double the 55.4% gain of the rest of the S&P 500. That outperformance has pushed the group's weighting even higher at the top of the index.
A history lesson from 1965
The last time the S&P 500 was this concentrated, AT&T, General Motors, Standard Oil, IBM, and DuPont rounded out the top holdings. Only four of those companies remained members of the index the entire time since; the rest went bankrupt, merged, or exited through other corporate actions.
That earlier period of concentration was followed by weak returns. According to S&P data, the S&P 500 averaged just 1.2% annually from June 1965 through June 1975.
What it means for VOO investors
Today's concentration centers on one theme: AI. Each of the index's top 10 holdings is investing heavily to build out AI products and services. Bulls point to a McKinsey estimate that global investment in AI and traditional infrastructure could reach nearly $7 trillion by 2030, while one analyst believes Meta's newer AI services could add $10.8 billion in annualized revenue for the company by the end of next year.
However, if AI fails to live up to the hype, the S&P 500 could see a sharp contraction as tech-related names lose value. This concentration has already benefited VOO, which has delivered a more than 15% annualized total return over the past decade. That is above the S&P 500's longer-term historical average, which is closer to 10%. That is why some investors choose to complement VOO with other ETFs to further diversify their holdings.
Source: Fool
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