Why Looking Beyond The S&P 500 Might Be The Smartest Move You're Not Making

The S&P 500 has been the default answer to almost every investing question for the past decade. Roughly 270% cumulative total return between 2016 and 2025. Hard to argue with that. But there's a growing problem hiding inside that impressive track record, and it has to do with just how narrow the index has become.

The Concentration Problem Is Real

The top 10 stocks in the S&P 500 now account for around 40% of the entire index. That's the highest level of concentration since at least the early 1970s. To put that in perspective, back in 1990 the top 10 made up roughly 19% of the index. Even at the peak of the dot-com bubble in 2000, it only reached about 27%. RBC Wealth Management published a good breakdown of how this "Great Narrowing" has evolved over the past 35 years, and the numbers are pretty striking.

Today? A single stock (Nvidia) sits at roughly 7-8% of the index by itself.

Information technology alone makes up about 33-35% of the S&P 500's total weight. Add in tech-adjacent names from communication services and consumer discretionary, and well over half the index is driven by a handful of sectors that all move on similar themes. AI spending, ad revenue, cloud growth, semiconductor demand.

So when someone says "I'm diversified, I own an S&P 500 index fund," the reality is different. You own 500 stocks on paper. But the performance of your portfolio is shaped by maybe 10-15 companies. That's a concentrated bet wearing a diversified costume.

We've Seen This Movie Before

The last time US equity concentration got anywhere close to these levels was the late 1990s tech bubble. What happened next wasn't pretty. Growth stocks fell over 57% from the 2000 peak through 2008. Nearly a decade of pain, while value stocks and international markets with different sector profiles held up quite well.

I have to admit, it's easy to dismiss this comparison. "This time it's different" is always the refrain. And maybe it is. Today's mega-cap tech companies are genuinely profitable, unlike many dot-com darlings. But the structural risk of concentration doesn't disappear just because the underlying businesses are better.

What Actual Diversification Looks Like

True diversification means owning assets that don't all move in the same direction at the same time. The technical way to measure this is correlation. Two assets with a correlation of 1.0 move in perfect lockstep. At 0.0, they're completely independent.

The problem with adding more US stocks to a US-heavy portfolio is that correlations within the same market tend to be high, especially during downturns. International markets offer something different because their sector compositions are different.

The US is the outlier here. Most major international indices have a far more balanced sector mix, and almost none carry anything close to the S&P 500's tech concentration.

The Australian Market: A Case Study

We've spent a fair bit of time looking at how different markets compare to the S&P 500, and the Australian Securities Exchange is one of the more interesting examples. Not because it's the biggest (it's the 14th largest globally), but because its sector profile is almost the mirror image of the US market.

Where the S&P 500 is dominated by tech, the ASX 200 is dominated by financials and materials. Those two sectors alone account for over 57% of the Australian index. Tech? Just 2.2%.

That structural difference shows up in the data. Over the decade from 2016 to 2025, the rolling correlation between the ASX 200 and S&P 500 averaged around 0.65-0.75. During calm, sector-driven markets, that correlation drops toward 0.50 or lower. The two indices genuinely move to different rhythms when things are quiet. It's only during global panics that correlation spikes toward 0.90. There's a detailed year-by-year comparison of ASX vs. NYSE returns, volatility and correlation that breaks this down further if you want to see the full picture.

The practical effect? In 2022, when the S&P 500 dropped 18.1% as tech got crushed, the ASX 200 was down just 1.3%. That's exactly the kind of offsetting behaviour you want from a diversifier.

Fair enough, the ASX hasn't matched US returns over the full decade. About 135% cumulative in local currency versus 270% for the S&P 500. But that misses the point. You don't add a diversifier because it beats your core holding. You add it because it behaves differently when you need it most.

Currency: The Hidden Variable

One thing US investors often overlook when buying international stocks is currency exposure. When you buy Australian shares without hedging, you're also making a bet on the Australian dollar.

Over the past decade, the AUD has generally weakened against the USD, knocking roughly 1-2 percentage points per year off returns for unhedged US investors. But it's not always a drag. Because the Australian dollar tends to rise with commodity prices, it actually amplifies the diversification effect. When commodities are hot and tech is not, the AUD typically strengthens at the same time the ASX outperforms.

Whether to hedge or not is a separate discussion. But it's something to be aware of before allocating to any international market.

So What Should You Actually Do?

We're not going to tell you to sell your S&P 500 holdings. The US market remains the deepest, most liquid equity market in the world. But if 100% of your equity allocation is sitting in the S&P 500, you might be less diversified than you think. Rockefeller Capital Management made a similar point recently, suggesting that small caps, international equities and long/short strategies all deserve a look as counterweights to large-cap tech exposure.

Even a modest allocation (10-20%) to international markets with different sector profiles can meaningfully change your portfolio's risk characteristics. A few things to consider:

• Sector exposure matters more than geography. Adding European banks and Australian miners gives you something the S&P 500 doesn't have. Adding Canadian tech stocks probably doesn't.

• Correlation is not constant. It rises during crises and falls during normal times. That means international diversification works best in the periods between crises, which is most of the time.

• Don't chase returns. The S&P 500 has crushed most international indices recently. That doesn't mean it always will. Mean reversion is a powerful force over longer timeframes.

The biggest risk for most US investors right now isn't a broad market drop. It's that a tech-specific event takes down the biggest names in the index, and they realise too late that their "diversified" index fund was really a tech fund all along.

Looking beyond the S&P 500 isn't about giving up returns. It's about making sure your portfolio can handle whatever comes next.

FAQ

Is the S&P 500 actually diversified?

On the surface, yes. It holds 500 companies across 11 sectors. But in practice, the top 10 stocks account for about 40% of the index, and information technology dominates the sector weights at roughly 33%. That's a level of concentration not seen in decades, which means real diversification is lower than the number of holdings suggests.

What international markets offer the best diversification from US stocks?

Markets with different sector compositions provide the most benefit. Australia (financials and materials), the UK (financials and energy) and Japan (industrials and consumer goods) all have lower correlation with the S&P 500 than adding more North American exposure would.

Does currency risk make international investing too complicated?

Not necessarily. Currency movements can actually amplify the diversification effect. The Australian dollar, for example, tends to rise when commodities are strong, which is often when the ASX outperforms. Hedged international ETFs are available if you'd prefer to remove currency risk entirely.

How much of my portfolio should be in international stocks?

There's no single right answer. Many financial professionals suggest 20-40% international exposure, but even 10-15% in markets with different sector profiles can make a meaningful difference to portfolio risk.