There are meaningful ways to diversify, even as AI exposure bleeds into other asset classes
Five companies contributed about half of the S&P 500s growth between April 1st and May 6th of this year: Alphabet, Nvidia, Amazon, Broadcom, and Apple. A UBS measurement of “effective constituents” of the index, defined as the number of stocks materially contributing to the index’s performance, hit a record low of 42 in early May. Typically, that number sits at around 100. The top ten companies in the S&P 500 now represent almost 40 per cent of the overall index and only one of those names, Berkshire Hathaway, isn’t directly related to technology or AI.
Josh Sheluk doesn’t believe that this concentration is a problem, yet, but he sees it as a source of potential risk. The Portfolio Manager at Verecan Capital Management adds that index investors may not be aware of just how concentrated these index exposures can be. He notes that US equities represent roughly two thirds of the MSCI All World index, resulting in a relatively heavy weight towards these AI-related tech names. He also highlights the rise of AI-related themes in private equity markets, as AI startups stay private, and public credit markets, as the AI hyperscalers issue more debt to finance their data centre buildouts. While an index approach may lead some investors into a degree of concentration they didn’t expect, Sheluk also cautions against overcorrection.
“I probably wouldn’t call it a problem, but I would say it’s a risk,” Sheluk says. “When you see that all the biggest stocks from the biggest companies in the world are all in the same sector, all in the same country, or all in a related sector, then all of a sudden I think the risks get magnified… Historically concentration has not been as impactful in terms of some of the risk metrics we’ve seen. But if you just look at things intuitively, the vast majority of these companies are all being driven by the same factor. If you’re allocated to that index or heavily allocated to these companies and that one factor decides to go the opposite direction, then intuitively you would think that your portfolio is at more risk of a severe disappointment or severe disruption in its growth trajectory.”
Sheluk explains that we already saw the AI theme take a different direction on markets at the start of 2026, with a broader range of names and sectors outperforming technology and the S&P 500 index struggling on aggregate. The tech leadership of that index only resumed in the wake of the US-Israeli war with Iran.
Seeing concentration risk on a major index may evoke some trauma-related memories of Nortel in the minds of Canadian investors. Sheluk notes, though, that the memories of that pain have tended to fade among investors and that the current situation on US markets is far from where Canada was during the peak of Nortel’s run.
Rather than a reason for alarm, Sheluk sees cause for reflection in the state of current index investing. Index investing, he says, has been a good way to achieve strong results over a long time horizon, but he notes that many investors today don’t realize that there will be long stretches of poor performance baked into that long time horizon. He cites the example of US markets from 2000 to 2010, a very challenging period bookended by market crashes. There are risks of lost decades in index performance and Sheluk believes that our short memories and the experience of an almost 20-year bull market replete with V-shaped recoveries has skewed investors towards index performance. He doesn’t believe that the current concentration on the market will inevitably lead to another lost decade, but he sees risk in the index’s exposure to a single theme, should that theme change.
For advisors seeking to help their clients manage index and concentration risk, Sheluk advocates for agnosticism. Staying open to various forms of risk mitigation can be helpful, whether that is in using equal weight strategies, actively managed ideas, or more oblique strategies that pick up different market themes. He notes that factor based strategies like value can help diversify away from concentration risk. Advisors could also consider forms of index re-weighting that adjusts for heavy concentration without going fully equal weight. He makes the core point that no single strategy will achieve this diversification in isolation and that a broader mix of allocations can be helpful, especially when positioned in the context of a client’s personal goals.
“The way that we do it as advisors is by refocusing on clients’ goals and expectations and their priorities and time horizons,” Sheluk explains. “So we really don’t need to be hitting a 15% rate of return for our clients to reach their goals for the most part. And if we do need to hit that rate of return, we’re probably doing more to level set on the goals than trying to get to that return target. And so a lot of our conversations recently, if we’re not keeping up with the S&P 500 as an example, has been, well, here’s what we are doing and actually that’s probably double or triple what we need to do to get to your financial objectives.”
