Stock market concentration and fund portfolios
Way too much ink has been spilt on the increasing concentration of the US stock market. The share of the total market cap of the ten largest US companies has gone from 13% in 2015 to more than 30% a decade later. Clearly, this increases the risk for investors to incur large losses should any of these megacaps get into trouble. But it also decreases the ability for these megacaps to grow even larger.
First, a sidenote that bothers me a lot. Often, commentators and investors argue that the concentration of the S&P 500 is much less than the concentration of, say, the FTSE 100 or the Swiss Market Index. But the clue is in the index name. The S&P 500 has 500 members, the FTSE 100 only 100 and the SMI even fewer. So, of course, the top 10 stocks are going to have a much larger share in the FTSE 100 and SMI than in the S&P 500; that is pure arithmetic. The problem with the FTSE 100 and the SMI is not that they are more concentrated than the S&P 500 but that they contain fewer stocks to begin with.
Ok, rant over – deep breath.
If an index becomes more concentrated, fund investors start getting into trouble. Most developed markets have regulations in place that limit the concentration of mutual funds that can be marketed to retail investors. In the EU, UCITS has the 5/10/40 rule, while the US has the 50/5/10 rule.
Lubos Pastor and his colleagues at the University of Chicago showed that when a benchmark index becomes too concentrated, fund investors eventually have to sell the stock even if they are fundamentally bullish about it. If a fund manager remains optimistic about a company, she wants to increase the weight of that stock in the portfolio above the index weight, but that may cause her to hit the 5% limit for the security in the portfolio. Hence, the closer the weight of the largest stocks in the index to this limit, the more selling pressure exists. Even if sentiment remains positive, regulation creates forced sellers.
And don’t get me wrong about this. I think that is a good thing. I started my career in the late 1990s, and I can assure you that most fund managers remained bullish about tech stocks until long after the bubble burst. Had they been able to buy more of that stuff, they would have, creating even bigger losses for their investors. This kind of regulation exists for a reason, and it protects both investors and fund managers alike.
US stock market concentration and equity ownership via funds
Source: Pastor et al. (2026). Note: RIC = Registered Investment Companies.
The regulation creates forced sellers in the top names. It also creates something less visible: forced concentration one layer down. When a manager is capped at 5% in Apple, the marginal dollar she wanted to put there goes to the next-most-correlated name instead. The fund technically looks less concentrated because Apple sits at 4.9% rather than 7%. But the six stocks filling the gap Apple couldn't occupy are all running on the same AI thesis, and they'll all sell off together in a rotation because the correlation doesn't care about the regulatory limit.
Your 1990s point makes this concrete. Those managers didn't stop being bullish on tech when they hit their concentration limits. They just spread the bullishness across more tech names, which made the fund look diversified while the thematic exposure stayed identical. The regulation solved the single-name risk. It didn't touch the thematic risk underneath, and thematic risk is the one that actually kills performance when the sector turns, because every substitute position sells at the same time for the same reason.
The late 1990s parallel you draw is the sharpest part of this piece, because it names something allocators rarely admit: conviction and capacity are not the same constraint.
Reading across 68 asset manager reports this month, Information Technology sits at 71.4% overweight, the strongest sector conviction in the entire panel.
But if the 5% UCITS limit is already binding for managers who want more exposure, that consensus overweight is softer than the percentage implies. The regulation doesn't change the view. It changes what the view can actually do to a portfolio.