Yahoo Finance

Financial market participants who prefer to invest in exchange-traded funds for their diversification benefits could be “in for a rude awakening,” says this venture capitalist, as the top ten stocks in the S&P 500 represent 40% of the index market capitalization.

What Happened: Chamath Palihapitiya, the billionaire investor, and former Facebook executive, explains that greater concentration in a few stocks increases the risks of investing.

He highlighted the inequality in the weight of the stocks within the S&P 500 index in an X post on Sunday and said, “If there is any market volatility, the lack of diversification could cause massive impairment.”

Don’t Miss:

• ‘Scrolling To UBI' — Deloitte's #1 fastest-growing software company allows users to earn money on their phones. You can invest today for just $0.26/share with a $1000 minimum.

• The global games market is projected to generate $272B by the end of the year — for $0.55/share, this VC-backed startup with a 7M+ userbase gives investors easy access to this asset market.

Kevin Gordon, the director and senior investment strategist at Charles Schwab shared a graphic showing the same.

However, this holds true for ETFs mirroring S&P 500’s weights. Spencer Hakimian, the founder of Tolou Capital Management, replied, to Palihapitiya’s post and said that “Equal weight ETF's are always available.” However, such ETfs also come with their rebalancing and tax costs,

See Also: Elon Musk Told The U.N. If They Could Show A Plan For Ending World Hunger He'd Donate $6 Billion – ‘I Will Sell Tesla Stock Right Now And Do It'

Why It Matters: The following are the top ten stocks by index weight within the S&P 500 index. These stocks include the ‘Magnificent Seven’ stocks with various classes of their shares, along with Broadcom Inc (NASDAQ:AVGO) and Berkshire Hathaway (NYSE:BRK). The information technology sector has the highest weightage among the top 10 S&P 500 constituents.

Source: S&PGlobal Website

For a market capitalization-weighted index, the weights are typically proportional to a company’s market cap, giving larger companies greater influence. However, an equal-weighted Index assigns the same weight to each constituent stock, regardless of its market size.