Your Index Fund Is a Bigger Bet Than You Think

Most people who own an index fund chose it so they wouldn’t have to pick individual stocks.

If you’re looking for an index fund on your statement, all you’ll find is one small line that says something like "S&P 500 Index" or "Target Retirement 2030." There’s no stock to watch. You own a small bit of everything. You’ll barely notice if one company stumbles; the other 499 should pick up the slack, or so the thinking goes. The underlying idea is to spread the risk.

To a large degree, index funds do just that, and it is still the cheapest way to own a small part of American business. If you’re looking for the basics on how these funds work, our explainer, What Is an Index Fund?, walks you through them.

Nature has its own index fund. The salmon that come home to Bristol Bay in Alaska each summer don’t belong to a single run. These salmon belong to several hundred separate populations. Each is bound to its own stream or lake. Each has a good or a bad year according to its own schedule.

In 2010, a research team measured the salmon run, publishing their findings in the journal Nature. The number of salmon returning to the spawning grounds each year varies by less than half as much as it would if all the fish came from one population. The researchers found that the fishery would have to close about ten times as often if only one population of salmon joined the run.

The researchers called this a portfolio effect, comparing the mixed population salmon run to the way funds spread across several diverse investments to reduce the risk in the entire portfolio.

The number of fish doesn’t create the protection. The protection lies in the many separate runs that carry them.

Your fund contains plenty of fish. On September 30, 2026, the S&P 500 had 503 holdings. The money isn't spread evenly across the holdings. Most index funds invest more in bigger companies, and as companies grow, so does their investment slice.

At the end of September 2026, the ten biggest companies made up 40.6% of the S&P 500 index, with the largest at 8.4%.

If you put $10,000 into a fund that tracks the index, about $4,060 will land in the ten largest companies, and about $840 will go into the biggest. The rest of your money will be shared among the other 490 or so, meaning each will receive an average of about $12.

Owning everything is not the same as owning evenly.

A broader fund reduces this effect, but by less than you may think. A total stock market fund with 3,531 stocks still had a third of its money in the top ten largest companies at the end of June. A target-date fund for people retiring in 2030 holds plenty of bonds and foreign stocks, so by our math, the same ten came to about 12 cents of every dollar in it.

It hasn’t always been this way. At the beginning of 1995, and again at the start of 2015, the ten biggest holdings came to around 18% of the S&P 500. And as the dot-com boom peaked in March 2000, the ten biggest held about 27% of the index.

The top ten reached a record on October 31, 2025, at 37.7% of the value of the entire U.S. stock market. That beat the old high of 37.3%, set on May 31, 1932, in records going back to 1926. Within the S&P 500 alone, S&P researchers say that the index hasn't been this top-heavy since the mid-1960s.

Michael Mauboussin and Dan Callahan, who studied this at Morgan Stanley, kept it in proportion in 2024: "The current concentration is high relative to the levels 10 years ago but has plenty of precedent."

The largest companies are as big as they are because they earn a lot. J.P. Morgan estimated that the ten largest companies accounted for 40.6% of the S&P 500 on September 30, 2026. These companies also made 36.1% of its profits over the past year.

The prices of the companies, measured against their forecast profits, were around their long-run averages. As Morningstar's researchers put it: "Concentration is neither bad nor good, per se."

A bigger bet is not the same as a bad bet.

In June 1965, the ten biggest companies in the S&P 500 also held about 38% of its value. They owned brands that everyone recognized: names like AT&T, General Motors, Standard Oil of New Jersey, which became Exxon, IBM, Sears, Kodak. The AT&T share at 9.11% was bigger than any single holding today.

People bought AT&T stock to be safe. TIME called it "the largest company on earth" in 1983, and the classic "widows and orphans" investment. In all, 3.2 million people and organizations owned AT&T shares. When the company was broken up on January 1, 1984, every shareholder kept their AT&T shares and also received one share in each of seven new regional phone companies for every ten they owned.

Three of the ten giants from 1965 eventually became bankrupt. By 2025, the ten companies that had once held 38% of the S&P 500 value held a combined 2.4% of the index value.

Still, people who held the whole S&P 500 did not lose out. The price had grown by 7.42% annually over sixty years, not counting dividends. The S&P's researchers noted that the index "was not excessively impacted by its underperforming heavyweights, because it included around 490 other companies."

It is also possible for the weight to sit in a single country. At the start of 1989, Japan carried 40% of the world's stock market index, well above the United States at 29%. If you owned the world's market in 1989, 40 cents of each dollar was invested in Japan.

Japan's main index, the Nikkei, closed at a record 38,915.87 on December 29, 1989. This record close, excluding dividends, wasn’t beaten until February 22, 2024, more than 34 years later. Today Japan holds just 5% of the world's stock market, as counted by the index company MSCI.

The finance professor Hendrik Bessembinder, after analyzing nearly 26,000 U.S. stocks, found that the stock market's entire net gain between 1926 and 2016 came from gains by companies in the top 4%. The rest, taken together, only managed to keep up with Treasury bills, the government's short-term IOUs.

An index fund can't miss those few big winners, because it owns every company in the index and allows the winners to grow. But the cost comes when a leader declines, because you hold a large share of it as it heads downward. Mauboussin and Callahan found that from 1950 to 2023, the single largest U.S. stock trailed the S&P 500 by an average of 1.9% annually.

Some investors will notice this and change nothing. That’s a reasonable choice, and the cheapest one. Others will change, and every change they make will buy something and cost something.

Some funds hold equal amounts of the same 500 companies, about 0.2% in each. These funds charge around 0.20% a year, considerably more than the 0.03% you’ll pay for the cheapest market funds.

Over the ten years to September 30, 2026, the equal-amount index trailed: $10,000 grew to about $24,800 instead of about $35,300, before dividends. Over a different stretch, 2003 to 2022, it came out ahead by about 1.5% annually. And in 2022, a down year, it lost less than the general market.

A total world stock fund can cost about 0.06% a year. One widely held fund of this kind invests around 21.7% in its top ten stocks. Around 62% of its money stays with U.S. companies.

More bonds provide another investment path. About 40% of a 2030 target-date fund already consists of bonds. According to the UBS Global Investment Returns Yearbook, which tracks markets back to 1900, stocks and bonds have each at some stage lost more than 70% after inflation, yet a mix of 60% stocks and 40% bonds has never fallen by more than 50%. Bonds come with their own risks, which we examined in Your Safe Money Is Someone Else's Cheap Loan.

Then there is rebalancing. If you had put 60% of your money in stocks and the rest in bonds in 1926 and left it alone, stocks would have averaged 85% of the mix through 2018, according to Vanguard’s data. This portfolio drift happens because stocks grow faster. Moving it back to the plan once a year keeps it close to the 60/40 mix. In Vanguard’s numbers, that meant a slightly lower return and a smoother ride. Bear in mind, selling to rebalance your portfolio outside an IRA or 401(k) could cost you in taxes.

The fall of today’s giants isn’t a given. The 1965 list of giants declined, and the index kept climbing. Japan's long wait was real too. Both happened to people who believed they owned the market.

In August we suggested you write down a plan built on four simple questions. The first was, What do I own, and why?

The line on your statement hasn’t changed in ten years. What it represents has.

Sources

• S&P Dow Jones Indices, S&P 500 factsheet, as of September 30, 2026 (503 holdings): spglobal.com (PDF)
• S&P Dow Jones Indices, S&P 500 Equal Weighted factsheet, as of September 30, 2026 (ten-year and 2022 price returns): spglobal.com (PDF)
• S&P Dow Jones Indices, Edwards and Didio, "In the Shadows of Giants," 2026 (the June 1965 top ten, three bankruptcies, 7.42% a year, "around 490 other companies," the mid-1960s): spglobal.com (PDF)
• Vanguard, Total Stock Market ETF fact sheet, June 30, 2026 (3,531 stocks; top ten 33.4%; 0.03% a year): vanguard.com (PDF)
• Vanguard, Target Retirement 2030 Fund profile, June 30, 2026 (35.5% in the total stock market fund; 40.2% bonds): vanguard.com (PDF)
• Vanguard, S&P 500 ETF fact sheet, September 30, 2026 (the ten largest companies by name, 40.6% together, the largest 8.4%, Alphabet's two share classes counted once): vanguard.com (PDF)
• Vanguard, Total World Stock ETF fact sheet, June 30, 2026 (top ten 21.7%; 61.9% United States; 0.06% a year): vanguard.com (PDF)
• MSCI, ACWI Index factsheet, September 30, 2026 (Japan 5.2% of the index): msci.com (PDF)
• J.P. Morgan Asset Management, Guide to the Markets, 4Q 2026, data to September 30, 2026 (the top ten at the start of 1995 and 2015; 40.6% of value and 36.1% of earnings; prices against expected earnings near their average): jpmorgan.com (PDF)
• Morningstar Indexes, Dan Lefkovitz, "Stock Market Concentration Has Surpassed Its 1930s Peak," 2026 (37.7% on October 31, 2025; 37.3% on May 31, 1932, in data from 1926; "neither bad nor good, per se"): morningstar.com
• Gallagher, "Tech Stock Mania: 1990s vs. Today," 2025 (the top ten at 27% in March 2000): ajg.com (PDF)
• RBC Wealth Management, Tyler Frawley, "The Great Narrowing," 2026 (equal weight ahead by about 1.5% a year, 2003 to 2022): rbcwealthmanagement.com
• Morgan Stanley Counterpoint Global, Michael Mauboussin and Dan Callahan, "Stock Market Concentration: How Much Is Too Much?" 2024 (the "plenty of precedent" quote; the largest stock trailed by 1.9% a year, 1950 to 2023): morganstanley.com (PDF)
• Schindler and others, "Population diversity and the portfolio effect in an exploited species," Nature, 2010 (Bristol Bay salmon): nature.com
• TIME, "Click! Ma Is Ringing Off," November 21, 1983 (AT&T, 3.2 million owners, the split): time.com
• UBS, Dimson, Marsh and Staunton, Global Investment Returns Yearbook 2024, summary edition (Japan 40% and the U.S. 29% of the world index at the start of 1989): ubs.com (PDF)
• UBS, Dimson, Marsh and Staunton, Global Investment Returns Yearbook 2026, summary (stocks and bonds each lost more than 70% after inflation at times; a 60/40 mix never fell more than 50%): ubs.com (PDF)
• Associated Press via Business Standard, "Japan's Nikkei stock index breaks its 1989 record," February 22, 2024 (the record close of 38,915.87 on December 29, 1989): business-standard.com
• Hendrik Bessembinder, "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics, 2018 (nearly 26,000 U.S. stocks, 1926 to 2016; the best 4% of companies): sciencedirect.com
• Invesco, S&P 500 Equal Weight ETF (0.20% a year): invesco.com
• Vanguard, "Getting back on track: A guide to smart rebalancing," 2019 (a 60/40 mix, 1926 to 2018: 85% stocks on average if never rebalanced, 60% if rebalanced yearly)
• Arcanomy calculation: $10,000 split by the September 30, 2026 weights, which puts $4,060 in the ten biggest companies, $840 in the largest and $5,940 across the other 490 or so, about $12 each on average; the 2030 target-date fund's top ten (35.5% times 33.4%, about 11.9%, or 12 cents of each dollar); the 1965 top ten's combined weight in 2025 (about 2.4%); $10,000 over ten years at 9.52% and 13.44% a year (about $24,800 and $35,300); the Nikkei, December 29, 1989 to February 22, 2024 (34.15 years).