Think your S&P 500 index fund is a sleepy, low-risk basket of “the whole market”? Today, nearly 40% of it rides on just ten companies, most of them plugged straight into the AI boom. Your “passive” plan is an active bet on a handful of tech giants. Is that diversification…or a stealth AI mega-fund? And what does it mean for your future?

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If you’ve got any kind of passive stock market exposure (a robo-advisor, a retirement account, some off-the-shelf managed product), then yes, you are. You can thank a man named John Bogle for that.

Bogle, the founder of Vanguard, popularised the index fund in the mid-1970s: a simple idea with very big consequences. Instead of trying to outsmart the market, you just buy the market. Or in this case, a fund that tracks the S&P 500, a basket of the 500 largest U.S. companies.

An index fund was radical for a few reasons. First, it’s cheap. Fees went from “are you sure that’s not a typo?” to “oh, that’s it?”.

Second, the index is maintained for you: it gets rebalanced and refreshed four times a year, so you’re not having to hand-pick winners or babysit losers.

Third, it gives people instant diversification. Only have $100 to invest? No problem! Your $100 gets sliced and spread across hundreds of companies, like a very industrious pizza cutter.

Even Warren Buffett has endorsed the “own the S&P 500 and chill” strategy. Set it and forget it, keep buying through thick and thin, and, given enough time, you participate in the long-term growth of corporate America. Not a bad way to get rich slowly, which, inconveniently, is how it usually works.

Not all companies are equal inside the S&P 500. It’s market-cap weighted, which means bigger companies take up more space in the index and push it around more. That’s both a blessing and a curse.

On the blessing side, when a company succeeds and grows, it naturally becomes a larger piece of your portfolio. This self-filtering is a big reason the S&P 500 has been so hard to beat over time: winners keep compounding, and the index quietly upgrades itself as it goes.

The curse is the mirror image: when investors get excited and bid up a stock, that enthusiasm also makes it a bigger slice of everyone’s “passive” portfolio.

That brings us to AI. The S&P 500 today is heavily steered by a handful of tech giants tied to the AI story.

Case in point: NVIDIA’s run has been…energetic. After tripling in 2023 and tripling again 2024, it’s still leading the market in 2025. Consequence: NVIDIA now accounts for more than 8% of the S&P 500. Every time you drop $100 into “the market,” roughly $8 goes to a single company whose fate depends on the world’s thirst for AI chips. That’s as much as the bottom 250 stocks get, combined.

The rest of the so-called Magnificent Seven (Amazon, Meta, Apple, Alphabet, Tesla, Microsoft) haven’t exactly been shy either.

As a group, they carry outsized weight in the index, and investors’ optimism about their AI futures feeds straight into their market caps, which feeds straight into their index weights, which… well, you get the idea. Your passive basket ends up with a very active view on AI.

It’s not necessarily a bad thing

The Magnificent Seven (Mag 7) are, inconveniently, excellent businesses: absurdly profitable, cash-rich, and positioned to benefit from the coming wave of AI applications. Some sell the picks and shovels (chips, cloud), some own the storefronts (platforms, distribution), and several do both.

And a tech-heavy index isn’t some glitch; it’s a pretty faithful mirror of the modern economy. Market-cap weighting points your money toward where profits and expectations live today. In that sense, a portfolio without an outsized tilt to tech and AI would be the oddity.

You are making a concentrated bet

But there are risks to the current market setup. Because AI enthusiasm has lifted a handful of very large tech names, the S&P 500’s day-to-day now increasingly tracks those giants.

That’s not a problem for representing the market: market-cap weighting is doing exactly what it says on the label. It is, however, a problem for diversifying your portfolio.

One of the original charms of the index fund was spreading your money across 500 companies. If one stock suffered a 50% face-plant, the damage to your portfolio was contained. Historically, that broad spread acted like insurance against any single blow-up.

That insurance works less well when ~40% of your money sits in the top ten names, many of them in the same industry, exposed to the same narratives and shocks.

At that point, your “own everything” basket starts to look like a tech-and-AI sampler platter. That’s great if the platter keeps winning; less great if it hits a cold streak or a regulatory speed bump.

Today, blindly buying the S&P 500 every month isn’t quite the bullet-proof plan it felt like in simpler times. Diversification isn’t just counting how many tickers you own; it’s owning different kinds of cash flows, in different industries, sectors, and countries.

One fix people suggest is an equal-weighted S&P 500 fund. As the name suggests, it spreads your money evenly across all 500 names instead of letting the biggest ones hog the plate.

That solves the diversification problem quite well. But it brings in other problems.

Namely, you don’t get the same filtration mechanism you get with the market-cap weighted index. If a company does poorly and the stock price drops, it still gets the same amount of your money as the successful company that keeps compounding.

There is another, much less discussed option: just own individual stocks. You don’t need 500 to capture most of the diversification benefit; roughly 15 well-chosen, non-overlapping businesses can get you close.

Of course, stock-picking has its drawbacks: you have to learn a sensible process and do the work. But if you’re willing to put in the time, you can build a portfolio that reflects your convictions rather than the market’s mood.

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