As the market caps of hyperscalers and AI stocks increasingly dominate market-cap-weighted index funds, the once tried-and-true approach to portfolio diversification may fail to provide investors with what it had promised in the past. Today, the top 10 holdings in the S&P 500 account for nearly 40% of the benchmark index. That leaves roughly 60 cents out of every $1 invested spread across the rest of the index.
There are several ways investors looking for broader diversification can approach this. In addition to U.S. mega- and large-cap exposure, they can turn to equal-weight index funds, micro- and small-cap stocks, and international equity funds, many of which have been handily outperforming the S&P 500 this year.
