How to Stay Invested in US Stocks Without a Tech Overweight

Big Tech figures such as Jeff Bezos, Elon Musk, Mark Zuckerberg and Sundar Pichai were visible at Donald Trump’s inauguration—a symbol of the tech sector’s rising influence that has only grown since. That dominance is reflected in the U.S. stock market and in popular benchmarks like the S&P 500 and the Nasdaq-100. For many Canadian investors, that heavy concentration in technology is a legitimate concern: while tech has driven much of the market’s gains, it also concentrates risk. A meaningful downturn in the sector can pull down a large share of an index-weighted portfolio.

If you’re uneasy about being overexposed to U.S. technology stocks, what should you do? Is it better to try to reduce that exposure or to accept the concentration and ride the trend? Asset managers have responded by offering several ETF alternatives designed to reduce concentration risk. Below is a clear look at the pros and cons of tech-heavy investing, along with ETF structures that provide broader or differently weighted exposure to U.S. equities.

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How tech-heavy is the U.S. market?

The exact weighting varies by index, but U.S. benchmarks are clearly tilted toward technology. At the end of 2024, technology represented 32.5% of the S&P 500 and a striking 59.5% of the Nasdaq-100. Both indexes are market-cap weighted, meaning larger companies have a bigger influence: when a company outperforms, its market value grows and it takes a larger share of the index. That dynamic amplifies the dominance of winning sectors.

For Canadian investors buying funds that track those indexes, the practical result is straightforward: a substantial portion of invested capital flows into the largest tech names. By the end of 2024, the top 10 stocks in the Nasdaq-100 made up 50.4% of the index’s weight, and only one—Costco—was not classified as a technology company. The S&P 500’s top 10 accounted for 37.3% of its weight, with Berkshire Hathaway the only non-tech name among them. Those concentrations matter when you consider portfolio risk and diversification goals.

Equal weight ETFs

One well-known alternative to market-cap weighting is equal-weight indexing. Rather than assigning weights by market value, an equal-weight ETF gives each stock the same allocation. For the S&P 500 that would mean roughly 0.2% per company, whether the holding is Apple or a much smaller constituent.

In Canada, equal-weight options include funds such as the Invesco S&P 500 Equal Weight Index ETF (EQL) and the Invesco NASDAQ 100 Equal Weight Index ETF (QQEQ), with currency-hedged versions available for those worried about exchange-rate swings. Equal-weight ETFs reduce concentration risk by preventing the largest winners from dominating the portfolio.

However, equal-weight ETFs have trade-offs. They usually come with higher fees—EQL’s management expense ratio (MER) is 0.20% and QQEQ’s is 0.28%, compared with around 0.09% for many market-cap S&P 500 ETFs and 0.20% for some Nasdaq-100 ETFs. Historically, they also can underperform during periods when a handful of large companies outperform the market. For example, over the five years leading up to 2024, EQL’s annualized return lagged a typical market-cap S&P 500 ETF, while QQEQ’s three-year annualized return trailed its market-cap weighted counterpart.

That underperformance occurs because equal-weight funds routinely trim strong performers back to the target weight and buy underperformers to restore balance. This rebalancing reduces concentration risk but also limits the portfolio’s exposure to extended bull runs concentrated in a few dominant names—exactly the scenario that boosted returns in recent years.

Capped index ETFs

Another option is a capped index, which places a hard limit on how much any single company may represent within an index. Canada’s S&P/TSX Capped Composite Index, for example, caps any single stock at 10% to avoid extreme concentration—an approach developed after past episodes where a tiny number of names dominated the index.

For exposure to U.S. equities with lower tech concentration, consider funds that track capped versions of the S&P 500. One example is the iShares S&P 500 3% Capped Index ETF (XUSC), which follows an index that restricts each company to a maximum 3% weighting. When a holding exceeds that ceiling, the excess weight is redistributed across the index at quarterly rebalances.

As of February 12, the sector split for such a 3% capped approach showed a considerably lower tech allocation—about 22.8%—and the top 10 holdings comprised roughly 24.4% of the ETF, a much more modest concentration than the uncapped indexes.

Capped ETFs can be slightly more expensive; XUSC, for instance, carries a modestly higher fee than some plain-market-cap alternatives. Historically the 3% capped S&P 500 has also produced somewhat lower returns than the uncapped S&P 500 over long periods—again reflecting the cost of constraining the largest winners.

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Do nothing and stay the course

There’s an influential body of research highlighting that a small number of stocks account for a large share of long-term stock market gains. One widely referenced study by Hendrik Bessembinder found that a relatively tiny subset of companies produced the bulk of aggregate market wealth, while most individual stocks historically matched the returns of risk-free U.S. Treasury bills. The practical takeaway: it is extremely difficult to pick the handful of future megawinners in advance.

For many investors, the simplest way to capture those rare winners is to hold a broad, market-cap weighted index fund. Market-cap indexes naturally allow winning companies to grow their weight over time, aligning portfolio exposure with the market’s most successful firms—whether they are technology leaders today or firms in other sectors in the future.