How diversified is a diversified fund?
"Five hundred companies" sounds like a lot of diversification. Whether it is depends on the weights, and the weights are decided by a rule the holder did not choose.
The concentration inside the index
Measured from each fund's published holdings on 2026-09-04:
| Fund | Companies held | Weight of the ten largest |
|---|---|---|
SPY.US — S&P 500 |
about 500 | 37.8% |
QQQ.US — Nasdaq-100 |
about 100 | 46.3% |
IWM.US — Russell 2000 |
1,953 | 3.2% |
EFA.US — developed markets ex-US |
658 | 13.8% |
The S&P 500 fund carries more than a third of its money in ten companies, and its largest single position was 8.1% — one company. The Nasdaq-100 fund carries nearly half in ten. On a day those ten fall together, "diversified across five hundred" is a description of the list, not of the risk.
Capitalisation weighting does this by design: the fund holds companies in proportion to their size, so when a handful become enormous the fund becomes those few. It is not a flaw in the rule. It is what the rule says, and the portfolio-theory course's warning about the one-stock problem applies at 8% too.
Sector and theme funds are concentration on purpose
A sector fund holds one of the eleven neighbourhoods from the sectors lesson, and a thematic fund holds a story — clean energy, robotics, a country. Both are legitimate tools and both are the opposite of diversification: their point is exposure to one thing. The trap is the label. A fund of forty "global technology leaders" is forty names in one sector that move together, and a holder who owns it beside an S&P 500 tracker owns the same ten giants twice. The hidden-overlap lesson in portfolio theory named this; here is where it comes from.
Overlap between funds you already own
Two trackers of different indices can hold the same companies at the top. The S&P 500 and the Nasdaq-100 share most of their ten largest positions, so a portfolio holding both has doubled its weight in the names that already dominated the first. Measure it rather than assume: take both funds' top ten, in the exercise below, and add the weights of every name that appears in both.
What the number is for
Not for avoiding concentrated funds — sometimes the concentration is the exposure you want. For knowing it. A holder who can say "a third of my equity money is in ten companies, and here they are" has done the work the label skipped. A holder who says "I own the whole market" has not looked.
In the data
The top ten is one concentration. The same money split by sector is the second, and it is the one a single bad year for an industry reaches:
Every figure is a share of the fund. One sector carries far more than an eleventh of it, and that sector's largest names are the same ones at the top of the holdings list, so the two concentrations are one bet counted twice. A holdings count on a fund's data page can mislead too: for this fund it reads 50, the length of the published list, while the fund holds about five hundred companies. The fund's own factsheet has the real count.
Try it now
- The ten largest holdings of SPY and of QQQ are below. Sum each fund's ten weights, then sum the weights of the names that appear in both lists. That third number is the overlap a portfolio holding both funds carries at the top.
- Now watch what concentration does on a chart. The broad fund and the concentrated one over the same year:
Measure the sharpest fall on each. The concentrated fund's is usually the larger, and the reason is the table at the top of this lesson. 3. Find the largest sector in SPY's weights above. Write down what a bad year for that one sector would do to a fund that describes itself as the whole market.