In 2020, US equity markets have taken a path that few could have seen coming. As a result, the S&P 500 Index has become more top-heavy than it’s been in 45 years. Below, I explain why this is the case, what it means for investors – and what they can do to help mitigate this concentration risk while maintaining exposure to the companies that make up this well-known benchmark.

The S&P 500 Index is dominated by just five holdings

Since its low on March 23, the S&P 500 Index has recovered by nearly 50% on the back of historic government and central bank intervention.1 Not only has the index turned positive for the year, it is now rapidly closing in on its February 19 high. During this year’s equity roller-coaster ride, the five largest holdings in the S&P 500 Index – Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (GOOG/GOOGL) and Facebook (NASDAQ:FB) – have shined brightly.2 The average year-to-date return among these largest five holdings is more than 36%,1 driven by the perceived safety of owning the biggest companies as well as the importance of technology and communication services in the work-at-home/stay-at-home world suddenly thrust upon us by the Great Lockdown.

Why is this outperformance by the mega-caps important? Like many benchmark indexes, the S&P 500 uses market capitalization to weight securities. This means that despite the significant number of securities that are included, the risk and return of the index – and of the traditional index funds that track it – is driven by the largest holdings. The dominance of just a few large holdings on overall risk and return is called “concentration risk.”

The recent run-up in these “biggest of the big” companies has created a situation in which the S&P 500 Index is more top-heavy than it has been in 45 years. As of August 7, the top five stocks accounted for nearly 23% of the weight in the S&P 500 Index, up from 16.8% at the end of 2019 and widely surpassing the 16.6% observed in December 1999 (which was in the midst of the final build-up before the technology bubble burst in March 2000).3

Benchmark indexes face historic levels of concentration risk

As shown in the chart below, the current concentration risk of the S&P 500 is only a few percentage points from the high of 27.7% reached in 1964.3 This amount of concentration risk is one that traditional passive investors haven’t faced in over four decades. When concentration risk is the simple result of market capitalization (versus, for example, the intentional choices of an active manager), it may leave investors vulnerable in a few different scenarios: when valuations mean-revert, when new competitors have a negative impact on the top companies, when regulatory risk emerges, and when the market experiences a rotation into more cyclical stocks.

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Concentration risk: The concentration in the top 5 holdings is nearly 23%, a level not seen since 1975

The light blue bar represents the current concentration figures as of August 7. The red bar illustrates the last time that the concentration of the index’s top 5 holdings was this high.

Source: S&P Global and Bloomberg, L.P., as of Aug. 7, 2020. In 1975, the top 5 holdings were IBM, Proctor & Gamble, Exxon Mobil, 3M, and General Electric. An investment cannot be made directly into an index. Holdings are subject to change and are not buy/sell recommendations.

While the S&P 500 has enjoyed a healthy total return of 71.4% (11.4% annualized) since late July 2015, these five names had an average total return of 277% (30.4% annualized), nearly four times that of the S&P 500 Index from July 28, 2015 to July 27, 2020.4 Their valuations have also expanded to the point that the average price/sales and price/earnings ratios for the top 5 are now 3x (7.43 vs. 2.33) and 2.3x (53.26 vs. 23.61) versus that of the S&P 500 benchmark, respectively.

Source: Bloomberg, L.P., as of July 27, 2020. An investment cannot be made into an index. Past performance is no guarantee of future results.

Against an ongoing backdrop of strength for these market giants, as evidenced by second-quarter earnings announcements, it is important for investors to remember that there are countless examples from financial history that tell us that the largest companies as measured by market capitalization do not maintain that lofty perch years into the future. As of today, the five largest companies in the S&P 500 have an aggregate weight that is higher than at any point since 1975, when the likes of IBM Corp. (IBM), Proctor & Gamble (PG), Exxon Mobil (XOM), 3M (MMM), and General Electric (GE) were the biggest of the big.5

Consider an equal-weight approach

Investors looking to diversify away from these top-heavy benchmarks while still maintaining exposure to their holdings may consider an equal-weight approach. Equal-weight strategies weight each of their holdings equally, so that overall performance cannot be dominated by a very small group of companies. So, using the example of the S&P 500, each of the 500 index companies would represent approximately 0.2% of the portfolio in an equal-weight strategy.

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The Invesco S&P 500 Equal Weight ETF (RSP) or the Invesco Equally-Weighted S&P 500 Fund (VADAX) may provide a potential solution for those investors that may want to diversify their portfolio to help mitigate this concentration risk, while still maintaining exposure to the S&P 500.


1 Source: Bloomberg L.P.; as of Aug. 3, 2020

2 Fund holdings as of Aug. 7, 2020. For RSP: (Apple, 0.24%. Microsoft, 0.21%. Amazon, 0.23%. Alphabet, 0.20%. Facebook, 0.22%.) For VADAX: (Apple, 0.21%. Microsoft, 0.21%. Amazon, 0.21%. Alphabet, 0.20%. Facebook, 0.19%.)

3 Source: S&P Global

4 Source: Bloomberg L.P. as of July 27, 2020

5 Fund holdings as of Aug. 7, 2020. For RSP: (IBM, 0.19%. Proctor & Gamble, 0.21%. General Electric, 0.16%. 3M, 0.19%. Exxon Mobil, 0.17%.) For VADAX: (IBM, 0.19%. Proctor & Gamble, 0.20%. General Electric, 0.18%. 3M, 0.20%. Exxon Mobil, 0.19%.)

Important information

Blog header image: Per Swantesson / Stocksy

The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.

The price-to-sales ratio is a valuation metric calculated by dividing a company’s market capitalization by its total sales over a 12-month period.

Risks for Invesco Equally-Weighted S&P 500 Fund

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

Because the fund operates as a passively managed index fund, adverse performance of a particular stock ordinarily will not result in its elimination from the fund’s portfolio. Ordinarily, the Adviser will not sell the fund’s portfolio securities except to reflect changes in the stocks that comprise the S&P 500 Index, or as may be necessary to raise cash to pay fund shareholders who sell fund shares.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

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Risks for Invesco S&P 500® Equal Weight ETF

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Investments focused in a particular industry or sector, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The Fund is non-diversified and may experience greater volatility than a more diversified investment. Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 80,000, 100,000, 150,000 or 200,000 Shares.

The opinions referenced above are those of the author as of Aug. 7, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.


All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

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Have the biggest mega-caps run too far? by Invesco US