- Low-cost S&P 500 index funds are the foundation of many portfolios and have been a great long-term investment – more than quadrupling in value over the last decade.
- But investing experts say a lack of exposure to small-cap and international equity markets is costing investors in 2026, and they are not properly prepared for what could occur during a bear market.
- Value-oriented ETFs which focus on dividends not only provide income but also add significant exposure to sectors with relatively low weightings in the S&P 500, such as health care, consumer staples, and energy.
Low-cost S&P 500 funds are the foundation of many portfolios, and holding a portfolio with a 90/10 split between the index and short-term treasuries has been famously championed by Warren Buffet as all that long-term investors need.
Indeed, the S&P 500, which represents 80% of total U.S. market capitalization, has been a long-term winner – more than quadrupling in value over the last decade. But by focusing only on the biggest public companies based in the U.S., popular market-weighted S&P 500 ETFs – including Vanguard’s VOO, BlackRock’s IVV and State Street’s SPY – pose concentration risks to investors because of outperformance in the information technology sector. This has driven some agitated investors to see parallels between the current market and the conditions leading up to the dot-com crash of 2000-2002, when the overall S&P 500 lost nearly half its value. It’s a particularly risky way to invest for those nearing retirement who may need to draw on market portfolios for income in the years ahead.
“This S&P 500 isn’t your father’s index,” said Mitch Goldberg, president of ClientFirst Strategy. “It’s super-powered by the information technology sector, which makes up about 37% of total value. Adding in the communications sector, which includes companies like Meta and Netflix, brings it to almost 50%.”
Investors can seek to limit volatility by adding exposure to other equity markets and uncorrelated assets.
What S&P 500-focused investors ‘miss out’ on
Goldberg noted that the five smallest sectors of the overall stock market – consumer staples, energy, utilities, real estate and materials – make up only 14% of the S&P 500, which impacts the overall diversification and risk profile of the index. He said investors should consider an equal-weighted S&P 500 index to add exposure to those sectors, as well as adding fixed income, international equity and small-cap domestic equity to their portfolios.
“Diversification helps you avoid becoming dependent on yesterday’s winners, which is a form of recency bias,” Goldberg said. “Adding non-correlated investments can improve your overall portfolio, and is important in a bear market, when you don’t want all your investments to move in tandem,” he said.
Overexposure to the S&P 500 also creates opportunity risk, as other types of investments have the potential for higher gains.
“If your exposure in the S&P 500 is too high, you’re missing out,” said Todd Rosenbluth head of research & editorial at TMX VettaFi. He pointed out that investments such as small-cap and international equity have been beating the S&P 500 this year, with prominent examples including the iShares Core S&P Small-Cap ETF (IJR) and the iShares Core MSCI Emerging Markets ETF (IEMG).
Source: https://www.cnbc.com/2026/08/22/stocks-market-investments-diversification.html