Mitigating S&P 500 Concentration Risk in 2026: Strategies to Reduce Reliance on the Magnificent Seven

The S&P 500's current structure is increasingly defined by the dominance of the Magnificent Seven (Mag 7), a group of seven large-cap technology stocks that now account for 34.3% of the index's total market capitalization as of December 2025. This concentration, up sharply from 12.3% in 2015, has created a portfolio risk that many investors may not fully appreciate. While the Mag 7 delivered an average return of 27.5% in 2025-well above the S&P 500's 17.5%- their outsized influence raises concerns about overexposure to a narrow set of stocks. Alphabet's 65.8% return, for instance, was driven by speculative bets on AI tools, while Apple's more modest 8.8% gain highlighted the uneven performance within the group.

The Risks of Concentration

The concentration of the Mag 7 in the S&P 500 has created a scenario where the index's performance is heavily tied to the fortunes of a few companies. This dynamic increases volatility risk, as any downturn in these stocks could disproportionately drag down the broader market. For example, if investor sentiment shifts against AI-driven growth stories or if regulatory pressures intensify, the S&P 500 could face significant headwinds. Additionally, investors who rely on passive index funds may unknowingly hold portfolios overexposed to these stocks, creating a misalignment with their diversification goals.

Innovative ETF Strategies to Diversify Exposure

To mitigate these risks, investors can adopt innovative ETF strategies that reduce reliance on the Mag 7 while maintaining S&P 500 exposure. One approach is to use equal-weight ETFs, which assign equal weight to all S&P 500 components rather than weighting them by market capitalization. The Invesco S&P 500 Equal Weight ETF (RSP) exemplifies this strategy, redistributing influence away from the Mag 7 and toward smaller or mid-cap stocks. This method reduces overexposure to overvalued or bubble-prone stocks and enhances factor diversification.

Another option is to pivot toward global ETFs that strip out U.S. exposure entirely. These funds focus on international markets, offering access to a broader range of equities and reducing the risk of being overly concentrated in the U.S. tech sector. For investors seeking value-oriented alternatives, ETFs like the iShares Edge MSCI USA Value Factor ETF and SPDR MSCI USA Value ETF have shown strong performance by targeting undervalued stocks outside the Mag 7.

Actively managed funds also provide a compelling solution. Unlike passive strategies, these funds can dynamically adjust allocations to prioritize diversification across sectors and geographies. This flexibility allows investors to navigate the unique dynamics of a highly concentrated market while maintaining U.S. equity exposure.

Total Portfolio Diversification: Beyond the S&P 500

For a more comprehensive approach, investors should consider total portfolio diversification strategies that extend beyond the S&P 500. Morningstar Holland recommends shifting focus to sectors like healthcare and U.S. small-cap equities, which offer more balanced exposure without sacrificing returns. BlackRock further advocates for allocating to non-U.S. equities, such as those in Japan and emerging markets, as well as incorporating uncorrelated assets like commodities, gold, and digital assets.

WisdomTree's U.S. Value Fund (WTV) and U.S. Multifactor Fund (USMF) provide additional avenues for diversification. These funds have outperformed in 2024 without relying on the Mag 7, offering exposure to U.S. equities through value and multifactor strategies. Morgan Stanley similarly emphasizes the importance of diversifying into high-dividend-paying stocks and preferred securities to reduce reliance on the S&P 500's top performers.

Conclusion

The concentration of the Mag 7 in the S&P 500 presents a clear and present risk for investors. While these stocks have driven much of the index's recent gains, their dominance increases volatility and reduces the benefits of diversification. By adopting equal-weight ETFs, global exposure, value-oriented strategies, and actively managed funds, investors can mitigate concentration risk without sacrificing market returns. Furthermore, total portfolio approaches that incorporate non-U.S. equities, alternatives, and sector diversification offer a robust framework for navigating the challenges of 2026. As the market evolves, proactive diversification will remain a critical tool for managing risk and preserving long-term growth.