Do Index Funds Really Offer Diversification? Not as Much as You Think

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Some use robo-advisors to buy these ETF shares for them and have little understanding of the underlying investments.

But the convenience could come at the cost of the index funds becoming dangerously top-heavy.

Here are more details on why index fundsmay not offer as much diversification as you think.

Yes, the S&P 500 includes 500 companies.

Again, 2% of the index makes up over 36% of the weighting.

Does that sound diversified to you?

GMO went on to note that the index was more than twice as diversified a decade prior.

At no other 10-year period have we seen that great a change in diversification, GMO reported.

But that sounds like a huge pain in the neck.

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How else can you diversify your portfolio?

There are some other types of funds to consider.

(Note that some mentioned I own in my personal portfolio.)

That keeps your holdings truly diversified across all 500 companies.

Keep in mind, many index funds own the same few giant corporations all with heavy weightings.

But both of them include Apple, for example, at the very top of the weighting list.

And Microsoft, and Amazon, and so forth.

So equal-weighted funds could be a good addition to your portfolio to increase diversification.

No one says you have to stick with U.S. companies either.

Diversify your portfolio further by buying shares in international developed market funds and emerging market funds.

Alternatively, you could just buy into the singular Vanguard FTSE All-World ex-US ETF (VEU).

They come in all shapes and sizes.

it’s possible for you to buy U.S.-only REITs or REITs from specific regions around the world.

A few mega-corporations tend to make up a disproportionate percentage of todays passive stock funds.