Weighted by size
Most broad index funds are "market-cap weighted". A company worth ten times more than another gets ten times more of each dollar you invest. Nobody decides this year by year. It follows automatically from company size.
So a fund with 500 companies is not 500 equal bets.
How concentrated is it?
The full bar width is 100% of the index.
The share held by the 10 largest U.S. companies roughly doubled in ten years. Several of them are large technology companies, which is why many people who hold a plain index fund already own a lot of the technology sector without having chosen it.
Is that good or bad?
Neither, on its own. Those companies became the largest because they grew the most, and index investors shared in that growth. The flip side is that the index now depends more heavily on a small group. If they stumble, the whole index feels it.
What matters is that you know the number. Then a headline about big technology companies tells you something about your own portfolio.
Overlap: owning the same thing twice
Concentration adds up across funds. Someone who holds an all-in-one fund, plus a U.S. index fund, plus a technology fund may think they hold three different things. Look inside and the same handful of companies sits at the top of all three.
That isn't automatically a mistake. It's a decision worth making on purpose.
Other weighting methods exist, such as equal-weight funds that give every company the same share. They behave differently and usually cost more. This lesson describes them; it doesn't recommend one.
Do this before the next lesson
- For each fund you hold, find the line "top 10 holdings as a % of the fund" and write it down.
- List the top 10 names for each fund side by side.
- Circle any company that appears in more than one list. That's your overlap.
An index fund holds 500 companies, weighted by size. How is your money spread?
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