Are You Really Diversified If You Own the S&P 500?
“Diversification” is a term that gets thrown around constantly by advisors and market commentators. And while everyone seems to know the dictionary definition, very few truly understand how it applies in the real world of investing.
A common misconception is that simply buying a U.S.-based index fund equals diversification. On the surface, it makes sense. You’re getting exposure to hundreds - even thousands - of companies. But in reality, those companies often share the same characteristics and risks.
Take the SPDR S&P 500 ETF (SPY). On paper, it looks like a diversified investment: 500 of the largest U.S. companies spread across multiple sectors. That sounds diversified - and compared to holding just a few individual stocks, it is. But it falls short of true diversification.
Here’s why the S&P 500 does not offer you true diversification:
Concentration risk: The top 10 companies (Nvidia, Microsoft, Apple, Amazon, Alphabet, etc.) now make up about 38% of the index. That means SPY is heavily tilted toward mega-cap tech.
No small caps: You’re missing exposure to smaller, innovative companies - the ones that could become the next Nvidia or Apple.
No asset-class diversification: The S&P 500 is 100% U.S. equities. It offers zero exposure to bonds, commodities, real estate, or international markets.
Sector imbalance: Technology alone represents more than 30% of the index, so when tech struggles, the whole index suffers.
The truth is, most investors who stop at the S&P 500 end up heavily concentrated in U.S. large-cap stocks. That’s only one corner of the investment universe. True diversification requires going beyond.
Areas to consider adding include:
International stocks (developed and emerging markets)
Small- and mid-cap U.S. equities
Fixed income (bonds and income-producing assets)
Real assets (real estate, commodities, infrastructure)
Alternatives (private equity, venture, crypto, etc.)
Bottom line: The S&P 500 is a fantastic foundation - a way to own the largest and most influential U.S. companies. But it’s not a full representation of the global markets or the broader investment landscape. To be truly diversified, you need to build beyond SPY.
Here’s to the future,
Matt McCall
Editor, Market Insights
