ETFs and the 2025 Stock Market Winners: Do Index Funds Capture Outsize Gains?

In 2025, the S&P 500 index delivered a modest 16% return, but a handful of stocks defied the broader market's muted performance. Western Digital (WDC), Robinhood Markets (HOOD), Seagate Technology (STX), Micron Technology (MU), and Newmont Corporation (NEM) surged by 154% to 304% year-to-date, driven by AI infrastructure demand, retail trading booms, and commodity price surges according to financial analysis. Yet, for investors relying on broad-market ETFs like SPY or IVV, these gains remain largely out of reach. This article examines whether ETFs truly capture the outsized returns of top-performing stocks-or if their diversification and structural constraints dilute these gains.

The Structure of ETFs: A Double-Edged Sword

ETFs like the SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV) are designed to mirror the S&P 500 index, which weights companies by market capitalization. This means larger firms like NVIDIA and Apple dominate the portfolio, while smaller or mid-cap stocks-regardless of performance-hold minimal influence. For instance, Micron Technology (MU), a 224% winner in 2025, accounts for just 0.40% of SPY's portfolio, and Newmont (NEM), up 182%, holds 0.35%. By contrast, NVIDIA alone constitutes 7.73% of SPY.

The math is stark: even if WDC, HOOD, and STX-each up over 200%-were weighted at 0.3%, their combined contribution to SPY's 16% return would be negligible. For example, a 0.3% allocation to a 300% gainer would add just 0.9 percentage points to the ETF's total return. This illustrates the core issue: ETFs are engineered for diversification, not to amplify the gains of individual stocks.

Case Study: The Dilution Effect in Action

Consider Micron (MU), a key beneficiary of AI-driven memory demand. Despite its 224% surge, its 0.4% weighting in SPY means its impact on the ETF's performance is dwarfed by the index's top holdings. Similarly, Western Digital (WDC), which rose 292%, and Seagate (STX), up 227%, are not even listed among IVV's top 10 holdings according to portfolio data. This is not an oversight but a structural inevitability: ETFs must hold all 500 S&P 500 constituents, diluting the influence of even the most explosive performers.

The data underscores this. As of December 2025, SPY's top 10 holdings accounted for 38.77% of its assets, while the top 10 stocks in the S&P 500-many of which were stagnant or underperformed-dragged on the index. For example, while WDC and STX surged, other storage and tech firms lagged, balancing out the gains. This "drag effect" is inherent to market-cap-weighted indices, which automatically increase allocations to rising stocks but cannot fully offset declines in underperforming ones.

The Trade-Off: Diversification vs. Concentration

ETFs' inability to capture outsized gains is not a flaw but a feature. By design, they mitigate risk through diversification. An investor who allocated 100% of their portfolio to WDC in 2025 would have earned 292%, but they'd also face catastrophic losses if the stock reversed. In contrast, SPY's 16% return reflects a safer, albeit less thrilling, path.

However, this trade-off raises a critical question: Can investors achieve both security and participation in high-growth sectors? The answer lies in strategic allocation. For instance, pairing an ETF with targeted exposure to AI or storage ETFs could offer a middle ground. Yet, this approach reintroduces complexity and risk, as sector-specific funds lack the broad diversification that makes SPY and IVV attractive.

Limitations and Considerations

The analysis is not without caveats. First, exact weightings for WDC, HOOD, and STX in SPY/IVV remain undisclosed in the sources reviewed, leaving room for uncertainty. Second, while ETFs dilute the impact of top stocks, they also insulate investors from the volatility of individual holdings. For example, Robinhood (HOOD), which joined the S&P 500 in September 2025 and surged 226%, could face a sharp correction if retail trading enthusiasm wanes-a risk that ETFs inherently manage.

Conclusion: ETFs as a Foundation, Not a Shortcut

The 2025 stock market highlights a fundamental truth: ETFs are not vehicles for capturing the highest-performing stocks but tools for accessing the broader market. While WDC, HOOD, and their peers delivered extraordinary returns, their small weightings in SPY and IVV ensure these gains remain largely invisible to ETF investors. For those seeking to participate in such opportunities, direct stock ownership or sector-specific ETFs may be necessary-but with the caveat that such strategies require active management and carry higher risk.

In the end, the choice between ETFs and concentrated bets depends on an investor's risk tolerance and time horizon. For long-term, passive investors, the S&P 500's 16% return remains a reliable benchmark. For those chasing the next WDC or MU, the path is far more uncertain-and the ETF's diversification, ironically, becomes a barrier to the very gains it cannot replicate.