S&P 500's top 10 stocks near 40% of index weight

The top 10 stocks account for close to 40% of the S&P 500's weight, and the top five for roughly 30%, according to Brent Leadbetter, head of RAFI Distribution at TMX VettaFi.

Leadbetter discussed concentration on the Money Life podcast during the Schwab IMPACT conference, ETF Trends reported. A cap-weighted index ties each stock's weight to its price, so the largest positions swell as they get more expensive regardless of the earnings behind them. The structure never rebalances in advance.

For an advisor whose core equity sleeve is an S&P 500 ETF, that allocation means roughly 30 cents of every dollar sits in five stocks. Moving part of that sleeve to a benchmark that does not weight by price will make client returns diverge from the index used in performance reports. The Invesco RAFI Strategic US ETF weights U.S. stocks by business size rather than market value and topped $1 billion in assets, as Private Wealth Daily previously reported.

Forty-three percent of attendees at a TMX VettaFi webcast said market concentration is the greatest risk to investor portfolios. Ari Polychronopoulos, the firm's head of RAFI Indices, discussed the topic with Leadbetter.

Asked whether the index fixes itself, Leadbetter said: 'Fixing it, unfortunately, is probably going to come in the form of disappointing returns.'

He compared the current concentration to earlier extremes. For the U.S., he pointed to the Reconstruction Era, when railroads dominated the economy and the Panic of 1873 followed. He also cited the Nikkei at the end of 1989, when a globally diversified cap-weighted investor held more than half of their allocation in Japan as it peaked, and the U.S. dot-com top in 2000.