A fund holding thousands of stocks can still be undiversified—if 10 names drive a third of its value

A fund holding thousands of stocks can still be undiversified—if 10 names drive a third of its value. As of March 31, 2026, the top 10 holdings account for approximately 34% of total market index funds, even though they represent just 0.3% of the underlying issuers. These funds, including the Vanguard Total Stock Market ETF (VTI) and the Fidelity Total Market Index Fund (FSKAX), hold 3,498 and 3,741 companies respectively. But because they are capitalization-weighted—each company’s weight determined by its total market value—the largest companies dominate. Nvidia (NVDA) alone makes up 6.2% of VTI as of February 28, 2026. Technology and communication services together account for 41% of the fund. Vanguard warns that more than 25% of the fund’s assets may be invested in issuers exceeding 5% of the portfolio, a threshold that classifies the fund as nondiversified under the Investment Company Act of 1940. That means the fund’s performance can be disproportionately hurt by a handful of stocks. An alternative is equal weighting, as seen in the Invesco S&P 500 Equal Weight ETF (RSP), where no single holding exceeds 0.28% and tech and communication services make up 22.5% of the portfolio. By contrast, the cap-weighted Vanguard S&P 500 ETF (VOO) allocates 7.31% to its largest holding and 43.9% to those sectors. But equal weighting demands constant rebalancing—buying losers and selling winners—which creates high turnover, higher fees, and higher volatility, undermining the core purpose of diversification: risk reduction. Nobel Laureate William Sharpe defined true diversification as owning all traded stocks and bonds globally in proportion to their market value. A cap-weighted total market index fund does exactly that for US stocks, reflecting the aggregate judgment of all investors. No other US stock fund offers broader exposure to the entire market.