Skip to navigationSkip to main contentSkip to right columnADVERTISEMENTTodd Shriber, The Motley FoolTue, August 4, 2026 at 8:20 PM GMT+2 4 min readNewer investors often hear about the virtues of diversification, while others are inclined to wait on stock picking until the foundation of their knowledge (and capital) grows. Those are among the reasons S&P 500 exchange-traded funds (ETFs) are so popular.So popular that the three largest ETFs are all S&P 500 trackers. That group includes the Vanguard S&P 500 ETF (NYSEMKT: VOO), the world's largest ETF. Another reason this ETF and its peers are so beloved is that some market participants believe these funds are diverse because they hold 506 stocks.Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »S&P 500 ETFs aren't as diverse as some investors assume. Image source: Getty ImagesThat's a mistake, but it's one that's easily corrected. Here's how investors can accomplish that objective.Quantity doesn't equal diversificationOn the surface, any ETF holding 500-plus stocks appears to be diverse, but investors should not conflate quantity with diversity. Upon further examination, investors will discover that S&P 500 ETFs aren't all that diverse. For example, as of June 30, the aforementioned Vanguard ETF allocated 38% of its roster to tech stocks.That's one sector out of 11 commanding 38% of the S&P 500, and just one other (financial services) garners a double-digit allocation.The perceived lack of diversification with S&P 500 ETFs isn't a knock on the funds themselves. Actually, it's confirmation that these products are functioning as expected. The Vanguard S&P 500 ETF and its closest rivals are cap-weighted funds, meaning the holdings are weighted by market capitalization.At the end of the second quarter, Nvidia was the largest holding in these funds. Cap-weighted funds tap into the market's "collective wisdom." If a diverse lineup results from that, great, but diversification isn't necessarily a priority when weighting stocks by market value.Investors can take another important step toward correcting the diversification assumption by doing a bit of homework to understand why some companies are added to the S&P 500. Yes, sector balance is a priority, but S&P Dow Jones Indices is also trying to compile a gauge that's representative of the U.S. economy at large. The economy is tech-heavy, hence the index's significant exposure to that sector. Fifty years ago, the gauge's largest sector exposure was to industrials.Don't expect overnight richesTerms and Privacy PolicyEU DSA contactPrivacy & Cookie SettingsMore Info