NerdWallet's Smart Money Podcast

Episode: Are Index Funds Still Diversified? Concentration Risk and a Top-Heavy Market
Date: February 19, 2026
Hosts: Sean Pyles, CFP® & Elizabeth Ayoola; Guest: Ryan Sterling (Wealth Advisor at NerdWallet Wealth Partners); Reporter: Ana Hillhosky

Episode Overview

This episode explores whether index funds—long a keystone of passive investing—are still as diversified as people believe, given the S&P 500’s unprecedented concentration in a handful of giant companies. Host Sean Pyles, co-host Elizabeth Ayoola, and guest Ryan Sterling unpack what “concentration risk” means in today’s market, discuss historical parallels, and give actionable tips for everyday investors. In the second segment, the hosts dig into listener questions about retirement catch-up contributions, especially recent changes affecting high earners.

Key Discussion Points & Insights

1. Are Index Funds Still Truly Diversified?

(Segment Start: 03:16)

Index Funds and “Set It and Forget It”
Historically, index funds (especially those tracking the S&P 500) were considered a safe, diversified way to grow money. However, a small group of mega-cap companies (e.g., Nvidia, Apple, Microsoft) now command an outsized share of the index. ([03:45])
How Index Funds Are Weighted
- The S&P 500 is “market cap weighted”—the largest companies get a larger slice of the index. Traditionally, the top 10 companies made up 18-20% of the index, but today, they represent about 40%. ([04:29])
- Quote (Ryan Sterling, 05:41):
  “The but is the reason these companies have grown to the size that they are today is because they’re really top performing companies… So when I think about the S&P 500 and I think about that market capitalization weight... I oftentimes see that as a feature, not a bug.”
Historical Perspective
- Never before has the S&P 500 been this “top heavy,” though previous peaks (late 1990s, 1970s) close to 29-30% preceded bear markets and recessions. ([06:52])
- In 1932, AT&T comprised 13% of the index, which was followed by exceptional market returns over 30 years.
  Quote (Ryan Sterling, 07:36):
  “Is the concentration a cause for pause? Absolutely. Is it a definitive: when it gets this concentrated, it will lead to a bear market? It’s not quite that tight of a relationship, but it certainly does bear paying attention to.”

2. The Risks of a Top-Heavy Market

(Segment Start: 08:16)

Volatility & Correlation
- When large companies like Nvidia (now ~8% of the S&P 500) stumble, it influences overall index returns more than ever before.
- Top companies are not only numerous in weighting, they are also highly correlated (many are in the same sector), amplifying potential market swings.
  Quote (Ryan Sterling, 08:47):
  “You do see a lot of correlation between these companies at the top. ... It’s not just one company being down … it’s that basket … all likely being down at the same time.”
Are Investors More Vulnerable?
- Yes, particularly to “lost decades” (periods of 10 years or more where stock returns are negative), as after the tech boom in 1999-2008.
  Quote (Ryan Sterling, 10:00):
  “If you invested in the S&P 500 on January 1, 1999 … you were negative over that 10-year period. That's very damaging for financial plans … So how do you protect against the lost decade? Well, that's where you further diversify.”

3. How Should Investors Respond?

(Segment Start: 11:30)

Broaden Diversification Beyond S&P 500
- Mix in mid-cap and small-cap US stocks, international and emerging markets stocks, bonds, and real estate investment trusts (REITs) to hedge against US mega-cap risk.
- Portfolios that included these asset classes during past lost decades performed considerably better than those holding only large-cap US stocks ([10:30]).
Parallels with Past Bubbles
- 1990s tailwind was the Internet; today it’s artificial intelligence (AI).
  Quote (Ryan Sterling, 11:37):
  “Looking back at the .com and looking at the rise of AI, I think it’s very likely that we will see an AI bubble … but these things are impossible to call the tops.”
Are Index Funds “Dangerous” Now?
- No, but they should serve a clear, differentiated role in portfolios. Avoid owning multiple index funds with highly overlapping holdings (e.g., owning both VTI, SPY, QQQ).
- Quote (Ryan Sterling, 13:54):
  “Every single line item in your portfolio should serve a specific purpose … There’s like a 90% correlation between all of those. You’re basically owning the same thing.”

4. Actionable Tips for Reducing Concentration Risk

(Segment Start: 16:00)

Add More International Exposure
- Non-US stocks are relatively cheap compared to US large caps, and history suggests they can outperform after periods of US dominance.
Don’t Ignore Bonds
- Bonds provide income and help reduce overall volatility—even for younger investors.
- Quote (Ryan Sterling, 16:19):
  “People say, ‘Hey, I’m young. Why do I need bonds?’ Bonds provide current income, but they also mute volatility.”
Evaluate Portfolio Overlap
- Scrutinize each holding for duplication; 10 different funds may all own the same dominant stocks.

5. Listener Question: Catch-Up Contributions for High Earners in Roth 401(k)s

(Segment Start: 22:15)

Rule Overview
- Catch-up contributions let workers 50+ add more to retirement accounts: in 2026, $8,000 extra per year in a 401(k), or $1,100 in an IRA. Special “super catch-up” for ages 60-63 ($11,250).
- As of 2026, high earners (FICA wages > $150,000) must make catch-up contributions to Roth accounts (post-tax), not traditional pre-tax accounts.
FICA Wages Clarified
- Federal payroll taxes funding Social Security and Medicare; both employees and employers contribute.
Pros & Cons of New Rule
- Downside: High earners pay taxes now, missing out on the deferral benefit.
- Upside: Roth contributions grow tax-free, withdrawals in retirement are tax-free, and Roths aren’t subject to required minimum distributions.
- Quote (Elizabeth Ayoola, 26:18):
  “A downside of this new rule is that if you are earning more now than you anticipate you would have say during retirement, you’re likely going to end up paying more in taxes. I know, that sucks.”
- Quote (Sean Pyles, 26:43):
  “There are some other benefits … tax-free withdrawals in retirement … more money that you can leave to grow in the market or leave for your beneficiaries.”
Mitigation Strategies
- Lower taxable income (e.g., contribute to an HSA).
- Explore IRAs (“backdoor Roth”), but be mindful of pro-rata rules and tax implications.
Who Actually Uses Catch-Ups?
- Only 16% of eligible participants actually make catch-up contributions; 14% max out annual limits.
- Calculation example: Catch-ups could net an extra ~$200,000 over 15 years for diligent savers ([28:42]).

Notable Quotes & Memorable Moments

“I oftentimes see that as a feature, not a bug…” (Ryan Sterling, 05:41): On why top-performing companies merit larger index weights.
“Is the concentration a cause for pause? Absolutely. … It certainly does bear paying attention to.” (Ryan Sterling, 07:36): Historical context for top-heavy markets.
“You could have ten different funds in your portfolio, but all ten funds could contain all the same stocks…” (Ryan Sterling, 17:16): On hidden overlap.
“If you invested in the S&P 500 on January 1, 1999 … you were negative over that ten-year period.” (Ryan Sterling, 09:56): The risk of lost decades.
“I think it’s a great way for the government to get their taxes now instead of later.” (Sean Pyles, 31:18): On new Roth catch-up rules.

Timestamps for Key Segments

03:16 – Introduction to concentration risk and why index funds may be less diversified now
04:29 – Explaining S&P 500 weightings and current levels of concentration
06:52 – Market history: periods of high concentration and their aftermath
08:16 – Impact of swings in top companies on overall market – correlation risk
09:56 – Vulnerability to “lost decades” for index-only investors
11:30 – Lessons from past bubbles and implications for today’s market
13:54 – Reducing portfolio overlap and building intentional diversification
16:00 – Expanding diversification: including international, small/mid caps, bonds
22:15 – Listener question: Catch-up contributions, Secure 2.0 Act changes, FICA explained
26:18 – Pros and cons of mandatory Roth catch-ups for high earners
28:42 – Example: How catch-up contributions can boost retirement savings
29:43 – What if you don’t have access to Roth or can’t max out? Alternate strategies

Practical Takeaways

Don’t assume all index funds are equally diversified; focus on what’s inside each one and your total portfolio overlap.
Mega-cap concentration is a real risk, but not a guaranteed harbinger of a market crash.
“Lost decades” happen—hedge by including small/mid caps, international stocks, and bonds.
High earners must now use Roth for catch-up 401(k) contributions—consider HSA contributions or “backdoor” Roths if you need to lower current taxable income.
Most Americans aren’t making full use of catch-up provisions—but the difference is meaningful for those who do.

Useful Resources

Final Thoughts

The era of “set it and forget it” broad market index investing might need a rethink as concentration risk rises. Savvy investors should assess their portfolio makeup, look for hidden overlaps, and deliberate on international and alternative asset classes. Rules around catch-up contributions have gotten more complex, especially for high earners, but understanding the nuances of Roth versus traditional accounts—and using tax-advantaged vehicles—remains essential for maximizing retirement outcomes.

Remember:
"Never be a forced seller, and never be a panicked seller." (Ryan Sterling, 14:28)

NerdWallet's Smart Money Podcast

Episode Overview

Key Discussion Points & Insights

1. Are Index Funds Still Truly Diversified?

(Segment Start: 03:16)

Index Funds and “Set It and Forget It”
Historically, index funds (especially those tracking the S&P 500) were considered a safe, diversified way to grow money. However, a small group of mega-cap companies (e.g., Nvidia, Apple, Microsoft) now command an outsized share of the index. ([03:45])
How Index Funds Are Weighted
- The S&P 500 is “market cap weighted”—the largest companies get a larger slice of the index. Traditionally, the top 10 companies made up 18-20% of the index, but today, they represent about 40%. ([04:29])
- Quote (Ryan Sterling, 05:41):
  “The but is the reason these companies have grown to the size that they are today is because they’re really top performing companies… So when I think about the S&P 500 and I think about that market capitalization weight... I oftentimes see that as a feature, not a bug.”
Historical Perspective
- Never before has the S&P 500 been this “top heavy,” though previous peaks (late 1990s, 1970s) close to 29-30% preceded bear markets and recessions. ([06:52])
- In 1932, AT&T comprised 13% of the index, which was followed by exceptional market returns over 30 years.
  Quote (Ryan Sterling, 07:36):
  “Is the concentration a cause for pause? Absolutely. Is it a definitive: when it gets this concentrated, it will lead to a bear market? It’s not quite that tight of a relationship, but it certainly does bear paying attention to.”

2. The Risks of a Top-Heavy Market

(Segment Start: 08:16)

Volatility & Correlation
- When large companies like Nvidia (now ~8% of the S&P 500) stumble, it influences overall index returns more than ever before.
- Top companies are not only numerous in weighting, they are also highly correlated (many are in the same sector), amplifying potential market swings.
  Quote (Ryan Sterling, 08:47):
  “You do see a lot of correlation between these companies at the top. ... It’s not just one company being down … it’s that basket … all likely being down at the same time.”
Are Investors More Vulnerable?
- Yes, particularly to “lost decades” (periods of 10 years or more where stock returns are negative), as after the tech boom in 1999-2008.
  Quote (Ryan Sterling, 10:00):
  “If you invested in the S&P 500 on January 1, 1999 … you were negative over that 10-year period. That's very damaging for financial plans … So how do you protect against the lost decade? Well, that's where you further diversify.”

3. How Should Investors Respond?

(Segment Start: 11:30)

Broaden Diversification Beyond S&P 500
- Mix in mid-cap and small-cap US stocks, international and emerging markets stocks, bonds, and real estate investment trusts (REITs) to hedge against US mega-cap risk.
- Portfolios that included these asset classes during past lost decades performed considerably better than those holding only large-cap US stocks ([10:30]).
Parallels with Past Bubbles
- 1990s tailwind was the Internet; today it’s artificial intelligence (AI).
  Quote (Ryan Sterling, 11:37):
  “Looking back at the .com and looking at the rise of AI, I think it’s very likely that we will see an AI bubble … but these things are impossible to call the tops.”
Are Index Funds “Dangerous” Now?
- No, but they should serve a clear, differentiated role in portfolios. Avoid owning multiple index funds with highly overlapping holdings (e.g., owning both VTI, SPY, QQQ).
- Quote (Ryan Sterling, 13:54):
  “Every single line item in your portfolio should serve a specific purpose … There’s like a 90% correlation between all of those. You’re basically owning the same thing.”

4. Actionable Tips for Reducing Concentration Risk

(Segment Start: 16:00)

Add More International Exposure
- Non-US stocks are relatively cheap compared to US large caps, and history suggests they can outperform after periods of US dominance.
Don’t Ignore Bonds
- Bonds provide income and help reduce overall volatility—even for younger investors.
- Quote (Ryan Sterling, 16:19):
  “People say, ‘Hey, I’m young. Why do I need bonds?’ Bonds provide current income, but they also mute volatility.”
Evaluate Portfolio Overlap
- Scrutinize each holding for duplication; 10 different funds may all own the same dominant stocks.

5. Listener Question: Catch-Up Contributions for High Earners in Roth 401(k)s

(Segment Start: 22:15)

Rule Overview
- Catch-up contributions let workers 50+ add more to retirement accounts: in 2026, $8,000 extra per year in a 401(k), or $1,100 in an IRA. Special “super catch-up” for ages 60-63 ($11,250).
- As of 2026, high earners (FICA wages > $150,000) must make catch-up contributions to Roth accounts (post-tax), not traditional pre-tax accounts.
FICA Wages Clarified
- Federal payroll taxes funding Social Security and Medicare; both employees and employers contribute.
Pros & Cons of New Rule
- Downside: High earners pay taxes now, missing out on the deferral benefit.
- Upside: Roth contributions grow tax-free, withdrawals in retirement are tax-free, and Roths aren’t subject to required minimum distributions.
- Quote (Elizabeth Ayoola, 26:18):
  “A downside of this new rule is that if you are earning more now than you anticipate you would have say during retirement, you’re likely going to end up paying more in taxes. I know, that sucks.”
- Quote (Sean Pyles, 26:43):
  “There are some other benefits … tax-free withdrawals in retirement … more money that you can leave to grow in the market or leave for your beneficiaries.”
Mitigation Strategies
- Lower taxable income (e.g., contribute to an HSA).
- Explore IRAs (“backdoor Roth”), but be mindful of pro-rata rules and tax implications.
Who Actually Uses Catch-Ups?
- Only 16% of eligible participants actually make catch-up contributions; 14% max out annual limits.
- Calculation example: Catch-ups could net an extra ~$200,000 over 15 years for diligent savers ([28:42]).

Notable Quotes & Memorable Moments

“I oftentimes see that as a feature, not a bug…” (Ryan Sterling, 05:41): On why top-performing companies merit larger index weights.
“Is the concentration a cause for pause? Absolutely. … It certainly does bear paying attention to.” (Ryan Sterling, 07:36): Historical context for top-heavy markets.
“You could have ten different funds in your portfolio, but all ten funds could contain all the same stocks…” (Ryan Sterling, 17:16): On hidden overlap.
“If you invested in the S&P 500 on January 1, 1999 … you were negative over that ten-year period.” (Ryan Sterling, 09:56): The risk of lost decades.
“I think it’s a great way for the government to get their taxes now instead of later.” (Sean Pyles, 31:18): On new Roth catch-up rules.

Timestamps for Key Segments

03:16 – Introduction to concentration risk and why index funds may be less diversified now
04:29 – Explaining S&P 500 weightings and current levels of concentration
06:52 – Market history: periods of high concentration and their aftermath
08:16 – Impact of swings in top companies on overall market – correlation risk
09:56 – Vulnerability to “lost decades” for index-only investors
11:30 – Lessons from past bubbles and implications for today’s market
13:54 – Reducing portfolio overlap and building intentional diversification
16:00 – Expanding diversification: including international, small/mid caps, bonds
22:15 – Listener question: Catch-up contributions, Secure 2.0 Act changes, FICA explained
26:18 – Pros and cons of mandatory Roth catch-ups for high earners
28:42 – Example: How catch-up contributions can boost retirement savings
29:43 – What if you don’t have access to Roth or can’t max out? Alternate strategies

Practical Takeaways

Don’t assume all index funds are equally diversified; focus on what’s inside each one and your total portfolio overlap.
Mega-cap concentration is a real risk, but not a guaranteed harbinger of a market crash.
“Lost decades” happen—hedge by including small/mid caps, international stocks, and bonds.
High earners must now use Roth for catch-up 401(k) contributions—consider HSA contributions or “backdoor” Roths if you need to lower current taxable income.
Most Americans aren’t making full use of catch-up provisions—but the difference is meaningful for those who do.

Useful Resources

Final Thoughts

Remember:
"Never be a forced seller, and never be a panicked seller." (Ryan Sterling, 14:28)

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Are Index Funds Still Diversified? Concentration Risk and a Top-Heavy Market

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Summary

NerdWallet's Smart Money Podcast

Episode Overview

Key Discussion Points & Insights

1. Are Index Funds Still Truly Diversified?

2. The Risks of a Top-Heavy Market

3. How Should Investors Respond?

4. Actionable Tips for Reducing Concentration Risk

5. Listener Question: Catch-Up Contributions for High Earners in Roth 401(k)s

Notable Quotes & Memorable Moments

Timestamps for Key Segments

Practical Takeaways

Useful Resources

Final Thoughts

Summary

NerdWallet's Smart Money Podcast

Episode Overview

Key Discussion Points & Insights

1. Are Index Funds Still Truly Diversified?

2. The Risks of a Top-Heavy Market

3. How Should Investors Respond?

4. Actionable Tips for Reducing Concentration Risk

5. Listener Question: Catch-Up Contributions for High Earners in Roth 401(k)s

Notable Quotes & Memorable Moments

Timestamps for Key Segments

Practical Takeaways

Useful Resources

Final Thoughts