Traders work on the floor of the New York Stock Exchange during morning trading on August 5, 2026 in New York City.
Michael M. Santiago | Getty Images News | Getty Images
low cost S&P500 Funds are the basis of many portfolios, and holding a portfolio with a 90/10 split between indexes and short-term Treasuries was famously championed by Warren Buffett as all that a long-term investor needs.
In fact, the S&P 500, which represents 80% of all U.S. market capitalization, is a long-term winner, having more than quadrupled in value over the past decade. But the popular market-weighted S&P 500 ETFs, which include Vanguard’s VOO, BlackRock’s IVV and State Street’s SPY, focus only on the largest publicly traded U.S.-based companies, exposing investors to concentration risk due to the information technology sector’s outperformance. This has led some spooked investors to see similarities between the current market and the conditions leading up to the dot-com crash of 2000-2002, when the entire S&P 500 lost nearly half its value. This is an especially risky investment method for people nearing retirement who may need to tap into a market portfolio for income over the next few years.
“This S&P 500 is not your father’s index,” said Mitch Goldberg, president of ClientFirst Strategies. “The information technology sector is a major contributor, accounting for around 37% of the total value. If you add in the communications sector, which includes companies like Meta and Netflix, the share rises to almost 50%.”
Investors can try to limit volatility by adding exposure to other stock markets or uncorrelated assets.
What investors who focus on the S&P 500 are “missing”
Goldberg noted that the five smallest sectors in the overall stock market (consumables, energy, utilities, real estate, and materials) make up just 14% of the S&P 500, which impacts the index’s overall diversification and risk profile. In addition to adding bonds, international stocks, and domestic small-cap stocks to their portfolios, he said investors should consider the equal-weighted S&P 500 index to add exposure to these sectors.
“Diversification helps avoid reliance on yesterday’s winners, which is a form of recency bias,” Goldberg said. “Adding uncorrelated investments can improve your overall portfolio, which is important in a bear market when you don’t want all your investments to be tied together,” he said.
Overexposure to the S&P 500 also creates opportunity risk, as other types of investments have the potential for higher returns.
“If you’re too exposed to the S&P 500, you’re missing out,” said Todd Rosenbluth, head of research and editorial at TMX VettaFi. He pointed to investments such as small-cap and international stocks that have outperformed the S&P 500 this year, with notable examples such as the iShares Core S&P Small Cap ETF (IJR) and the iShares Core MSCI Emerging Markets ETF (IEMG).
Ankur Patel, chief investment officer at Elevest, said investments outside the S&P 500 could also be more valuable. “S&P’s forward P/E ratio is about 20 times, compared to developed and emerging markets that are closer to 10 to 15 times. They pay much less for every dollar of overseas earnings.”
Investors can reduce volatility by looking to other types of value investments, said Neena Mishra, director of ETF research at Zacks Investment Research. For example, he recommends investors hold a portion of their portfolio in dividend growth ETFs, such as the Schwab US Dividend Stock ETF (SCHD), which focuses on dividend quality and sustainability. “Healthcare, consumer staples and energy receive the largest allocations within the portfolio, helping investors diversify away from the big-cap tech giants, and have significantly outperformed the S&P 500 this year,” he said.
In the fixed income space, we prefer short-term Treasuries over corporate bonds, high-yield, and long-term Treasury options. “In 2022, many investors will still be feeling the scars of the sharp decline in stocks and bonds caused by the sharp rise in inflation,” he said. Additionally, Mishra says that in the current environment of persistently rising inflation and volatile interest rates, long-term bond ETFs are inherently riskier. This is why very short-term Treasury Bill ETFs like iShares 0-3 Month Treasury Bill ETF (SGOV) and Vanguard 0-3 Month Treasury Bill ETF (VBIL) have become so popular among investors. “These cash-like products offer a decent level of income while being low risk,” she says.
Mishra also suggested investors consider a commodity that has been popular since ancient times: gold. “We believe gold deserves a place in any diversified portfolio due to its low correlation with traditional asset classes,” he said, noting that State Street’s SPDR Gold MiniShares Trust (GLDM) and BlackRock’s iShares Gold Trust Micro (IAUM) are low-cost options for long-term investors.
Can you handle a 20% drop in the market?
Patel advises investors to consider time horizon when deciding whether their exposure to the S&P 500 may be too high. “One way to think about this is, if the S&P 500 fell 20% tomorrow, would you change your plans? If the answer is yes, you’re overexposed.”
He explained that determining exposure depends on the investor’s goals. “Think not in terms of age, but in terms of when you actually need the money. Money that goes untouched for 10 years or more can be allocated more aggressively. “Buffett’s 90/10 rule is fine if you have a few decades to spare, but not if you need a down payment on a house within a few years, for example,” he said.
Investors seeking diversification should also consider the specific impact that holdings in artificial intelligence will have on an S&P 500-heavy portfolio. Volatility risks in AI can arise not only from market concentration, but also from changes in public sentiment and the risk of regulatory changes. “The information technology and telecom services sectors together make up almost half of the portfolio, with AI-related companies making up the majority,” Mishra said. “Portfolio diversification is often referred to as the only ‘free lunch’ in investing, as combining uncorrelated assets can reduce portfolio volatility without necessarily sacrificing expected returns,” he added.
Goldberg says there’s no denying that funds that track the performance of the S&P 500 are great tools for building wealth in a variety of products, especially since the invention of the 401(k), which sparked decades of one-way investment decisions for retirement savers. “But now I can’t help but feel that people have been hearing about it for so long that they think it’s a risk-free investment,” he said.
While low-cost S&P 500 index ETFs are a great way to grow wealth over the long term, investors should also consider adding uncorrelated assets to diversify their portfolio and reduce volatility.
