The S&P 500, one of the world’s most popular equity benchmarks, is often sold as a portfolio diversifier. But is it really?

Take a look at the 2024 version of the famous index and you’ll see it’s fairly concentrated—dominated, in fact, by mega-cap stocks from just one industry: technology.

Over the past 10 years, the index’s exposure to technology stocks has doubled from 16% to around 33%. The percentage hasn’t been that high since it peaked at 34.81% in March 2000, right before the dot-com bust. The current 33% weight is also much higher than the 15% median for tech over a 25-year period measured by Bespoke Investment Group in a study.

In 2024, just three stocks—Apple, Microsoft and Nvidia—have ballooned to become almost a quarter of the index’s equity exposure, a domination helped along by those companies’ lights-out, sizzling performance. (All three of them can be found in a tech-sector exchange-traded fund, the Technology Select Sector SPDR Fund.)

The only other industry sector that’s grown within the S&P 500 is consumer discretionary stocks, which have risen modestly from 9% to 10%. All the other sectors have either declined or remained flat.

This increased concentration will likely give some investors pause. What does it mean for their risk appetite? How can they get more diversification and reduce their exposure?

Two Antidotes
Let’s analyze two ETFs that could serve as antidotes to a tech-heavy S&P 500 portfolio.

One is the ALPS Equal Sector Weight ETF (EQL), which offers exposure to S&P 500 stocks by investing equal proportions in 11 Select Sector SPDR funds. The fund is rebalanced every quarter to keep its sector weightings in check.

Besides offering better sector diversification than the S&P 500, this fund also neutralizes the harm of any potential market crash in individual sectors that could otherwise leave investors flat-footed.

The Invesco S&P 500 Low Volatility ETF (SPLV), meanwhile, consists of 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. It has a more balanced approach to its sector allocations than the main index and no single industry group accounts for more than 20% of its equity exposure.

Because more than 49% of the Invesco fund’s holdings are classified as mid-caps, it also tilts toward smaller companies than the mega-cap heavy S&P 500.

What’s the key takeaway?

Until the S&P 500 sees a retreat in its current heavy sector and equity weightings, ETFs with an alternative approach are worth considering. That doesn’t mean investors should abandon the S&P 500 altogether; instead they could reduce their exposure and add positions to these ETF alternatives. If the S&P 500 ever becomes less dependent on one or two industry groups, reallocating back to it might be warranted.

Such additions can help investors keep their equity exposure … but also be ready when markets get bumpy.

Ron DeLegge II is the founder of ETFguide.com and author of several books, including Habits of the Investing Greats and Portfolio Architecture: A Handbook for Investors.