August 12, 2024

One of the most overused investing phrases is, “Don’t put all your eggs in one basket.” It’s a warning that owning too much of one type of asset can expose you to downside risk.
Conventional wisdom suggests owning 20-30 stocks to be properly diversified. Investors often think buying a broad index fund, say one tracking the S&P 500, is a diversified, cost-effective solution.
Well, buying a share of the exchange-traded fund SPDR S&P 500 ETF Trust (SPY) for around $550 is an easy way to own a bit of every company in the S&P 500. Conversely, you’d need over $4,800 to own one share in each of the 10 largest S&P 500 companies.
On its surface, SPY seems like a diversified, cost-effective option. However, the S&P 500 isn’t as diversified as most think.
Before 2020, the top 10 constituents of the index comprised 17%-27% of its overall weight. But that figure has ballooned. By mid-2023, the top 10 stocks accounted for about 30% of the overall weighting. Today, it’s nearly 36%.
So, today the S&P 500 is the most concentrated it’s been in at least 30 years. While SPY and the like still hold all S&P 500 companies, more than a third of the capital is allocated to just 10 firms.
Back in 2007, the top 10 companies were responsible for nearly 79% of the S&P 500’s gains, but the index rose less than 4% that year. When the top 10 were responsible for 59% of the total gains in 2020, the index jumped 16%.
None of this means the market can’t keep climbing – it can. But if you have all your eggs in the S&P 500 basket, you’re not as diversified as you think.