For years, investors have been taught that index investing is synonymous with diversification. Buy an S&P 500 index fund and you own 500 companies. But there’s an important distinction between owning many stocks and being meaningfully diversified.
In today’s world, market-cap-weighted indexes have become increasingly concentrated, with a relatively small number of companies accounting for a significant share of market returns. Much of that concentration is tied to the extraordinary growth of AI and other large tech names.
That doesn’t make index investing “bad.” Market-cap weighting is simple and transparent, but investors should recognize that owning an index doesn’t necessarily mean they’ve eliminated concentration risk.
The reality is you can diversify the number of holdings without diversifying the sources of risk.
This is precisely why investors should look beyond simply the number of securities they own and ask:
- How concentrated is my portfolio?
- What factors, or themes are driving returns?
- How much exposure do I have to the same companies across different funds?
- What happens if today’s market leaders stop leading?
The goal isn’t to simply own more underlying positions. It’s to understand the risks underneath those holdings.
Our latest Q3 2026 Market Insights Letter, “Index Funds: Are They Really Diversified?”, takes a closer look at index concentration, alternative weighting strategies and what today’s market environment could mean for investors. (Check it out here)
Because true diversification isn’t just about how many investments you own - it’s about how different those investments really are.
Disclosures
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. This blog is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Where applicable, portfolio characteristics are shown gross of fees.
Any capital markets views are intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Outlook may change at any time given shifting market conditions. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
