S&P Index Funds Face an Unprecedented Concentration Crisis—What Investors Must Know

The U.S. equity market is sending out a warning signal that hasn’t appeared before in modern history. The 10 largest stocks in the S&P 500 now control approximately 40% of the entire index’s weight, far exceeding the historical average of around 20%. This level of concentration is reshaping how investors think about S&P index funds and traditional portfolio strategies.

“If current market patterns hold true, this elevated concentration could translate into significantly lower returns from S&P index funds over the next decade compared to what a more balanced market would produce,” warns David Kostin, chief U.S. equity strategist at Goldman Sachs. The concern is real: when a handful of mega-cap stocks drive market movements, broader diversification becomes an illusion rather than reality.

Understanding the Concentration Problem in S&P Index Funds

When you invest in traditional S&P index funds, you’re getting exposure to 500 companies—but that exposure is weighted by market capitalization. This means the largest companies by stock price get the largest influence on performance. Today, that structure is creating an unusual vulnerability.

The top 10 companies account for roughly 35% of S&P 500 earnings while simultaneously representing 40% of index weight. At first glance, this seems defensible. But the concentration ratio itself reveals the risk: if these mega-cap stocks stumble, S&P index funds will stumble with them.

This situation differs dramatically from the long-term average. Never before has the market been this concentrated at any point in recorded history. Some analysts dismiss the concern, but others view it as a flashing red light for future performance.

Strategy One: Revenue-Weighted S&P Index Funds

One approach to addressing concentration risk in S&P index funds is the Invesco S&P 500 Revenue ETF (ticker: RWL). This alternative uses a fundamentally different weighting methodology: instead of market capitalization, it weights stocks based on their trailing 12-month revenue.

The fund imposes a strict 5% weight cap, meaning no single company can dominate the portfolio. This creates a more balanced exposure across the index. Current top holdings by weight include Amazon (3.8%), Walmart (3.8%), UnitedHealth Group (2.3%), CVS Health (2.1%), and Alphabet (2.1%).

The benefit is tangible: this revenue-weighted approach to S&P index funds reduced downside during recent market turbulence. When tariff announcements triggered a 19% decline in the traditional S&P 500, this revenue-weighted version fell just 15%. Over longer periods, however, the trade-off emerges. Since inception in 2008, the revenue ETF has returned 545% versus 630% for the conventional S&P 500.

One drawback is its expense ratio of 0.39% annually, meaning $39 in fees per year on every $10,000 invested. Additionally, earnings growth typically forecasts long-term performance better than revenue growth does. This fund works best for investors who prioritize concentration risk mitigation over maximum returns.

Strategy Two: Equal-Weight S&P Index Funds

A more radical alternative comes from the Invesco S&P 500 Equal Weight ETF (ticker: RSP). This approach to S&P index funds allocates identical weight to each of the 500 constituents, eliminating concentration risk entirely. No company—whether Apple or a smaller mid-cap—influences performance more than any other.

This equal-weight structure eliminates the revenue concentration problem that affected the first strategy. However, it introduces a different performance trade-off. Over the past decade, equal-weight S&P index funds underperformed their market-cap-weighted counterparts by more than 100 percentage points. That gap largely reflects the extraordinary returns from the “Magnificent Seven” tech stocks (concentrated in the traditional index) that drove substantial gains through robust earnings expansion.

If mega-cap tech dominance continues, equal-weight S&P index funds will likely continue lagging. Conversely, if market leadership rotates toward smaller companies, this strategy could outperform significantly.

The fee structure is more favorable: 0.2% expense ratio ($20 annually per $10,000 invested), which undercuts the industry average of 0.34%. This equal-weight approach appeals to investors seeking complete de-concentration without paying premium fees.

Deciding Between S&P Index Fund Alternatives

Choosing between these S&P index funds strategies requires honest self-assessment. The revenue-weighted option balances some concentration concerns while maintaining reasonable historical performance patterns. It’s suited for investors moderately concerned about mega-cap dominance but unwilling to sacrifice significant returns.

The equal-weight approach represents a bet that market leadership will broaden beyond today’s dominant tech stocks. It’s appropriate for those who believe the current concentration represents a temporary anomaly and who want maximum diversification protection.

For most investors, the decision hinges on risk tolerance and time horizon. Short-term traders might accept concentration risk in exchange for mega-cap upside. Long-term investors worried about the next decade of returns might prefer these alternative S&P index funds structures to hedge against concentration scenarios that historically have preceded performance slowdowns.