Here's How Market Concentration Spotlights VOO vs. RSP
- A small number of tech stocks continue to make up an outsized share of market gains.
- Market concentration is at its greatest in nearly a century, experts say.
In a year when the only constants seem to be surprise and disruption—from tariffs to DOGE and, not to mention, the sudden death of Ozzy Osbourne—market concentration lingers, its warning bell quietly chiming in the background.
As they have since 2023, a handful of tech stocks—Tesla Inc. (TSLA), Nvidia Corp. (NVDA) and others known as the Magnificent 7 due to their outsized gains—are still carrying markets.
Experts have been warning about a lack of market breadth, and today the S&P 500 is at its most narrowly concentrated since 1932, according to a video anaylsis posted by Cyprus-based trading platform Capital.com, which cited data from S&P Global’s Compustat.
NVDA, AAPL Gains Flag Risks
The Mag 7, which also includes Apple Inc. (AAPL), Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META), make up one-third of the market capitalization of the 500 companies in the S&P 500’s broad index, Capital.com stated. Nvidia’s market capitalization has crossed the eye-watering $4.1 trillion mark, light years away from Enphase Energy Inc. (ENPH), the smallest S&P 500 component with a $4.8 billion market cap.
Market pros generally see such concentration as a red flag, due to markets’ vulnerability to swings in the fortunes of a handful of companies, most of which are sensitive to overseas markets and the tariffs imposed by the Trump administration. Such a situation may also be hiding underlying problems and vulnerabilities in the other 493 stocks in the index, etf.com Research Lead Kent Thune, CFP, said.
Furthermore, broad ETFs may not be protecting investors against such concentration, Piper Sandler's chief investment strategist Michael Kantrowitz warned this week. For example, he said, if high-flying artificial intelligence stocks take a dip, investors in broad index ETFs might take an outsized hit to their portfolios.
The divergence in performance can be seen in a comparison of the $700.3 billion Vanguard S&P 500 ETF (VOO) and the $73.9 billion Invesco S&P 500 Equal Weight ETF (RSP). VOO weighs its holdings by market cap and reflects concentration, while RSP weighs all holdings equally and is less vulnerable.
They have diverged since Liberation Day in April, when President Donald Trump announced a range of tariffs, with VOO outperforming.
VOO vs. RSP Performance
Source: etf.com & FactSet Data
"The takeaway is that market concentration has led to outsized gains and huge inflows when those market leaders are hot, as they were in 2023 and 2024," Thune said, referring to the Mag 7. "But concentrated markets can mask underlying weakness (e.g., if only a few stocks are rising). Diversification strategies (like equal-weight ETFs or international exposure) help reduce dependence on a few dominant stocks."
