Investing in an S&P 500 index fund might seem like one of the easiest ways to diversify your portfolio. After all, you’re buying a slice of America’s 500 largest publicly traded companies instead of putting all of your money into a single stock.
But there’s a catch: Not all 500 companies in the S&P 500 are weighted equally.
That’s because the S&P 500 is weighted by market capitalization, which means the largest companies in terms of market cap make up the biggest portions of the index. And when a small group of mega-cap Tech companies — like Nvidia, Microsoft, and Apple — make sharp moves, that means investors may actually have more single-stock risk than the “index” label suggests.
Dryden Pence, chief investment officer at Pence Capital, sat down with TheStreet’s Caroline Woods to explain what he believes is a better way for investors to manage their risk: Invest in an equal-weight S&P 500 fund, then choose which Big Tech stocks to own separately.
That approach allows investors to maintain broad exposure to the markets while deciding for themselves how much risk they want to incur on individual technology companies.
Here’s why Pence believes equal weighting can help investors build a more diversified portfolio — without missing out on Big Tech’s growth potential, either.
Note: The market musings expressed herein are those of the interviewed guest and should not be treated as professional investment advice. Readers should consult a certified financial planner (CFP) for individualized advice based on their available capital, goals, risk tolerance, and time horizon.
Why market-cap weighting can increase your risk
Market-capitalization weighting allocates larger proportions of a fund or index to companies with higher total market values. This approach can work well when the largest companies lead the market, but it also means that their setbacks can have an outsized effect on the index.
Pence said 10 stocks accounted for about 40% of the S&P 500 and 50% of the Nasdaq at the time of the discussion.
Those figures illustrate his concern: A broad index can react sharply to disappointing news from a company such as Amazon or Google because those companies carry substantial weight in market-cap-weighted benchmarks.
So I think for a retail investor who has trouble sleeping at night, you want to be equal weight. And then if you really want to pick where you want your concentration, pick your concentration. Don’t let the index pick it for you.
Dryden Pence, when asked why he preferred equal weighting to market-cap weighting while still favoring Big Tech
Pence challenges a common assumption that buying a major index automatically delivers sufficient diversification.
An equal-weight fund gives each company roughly the same allocation when the fund rebalances, reducing the influence of the largest names. However, it does not eliminate stock-market risk, and it can underperform a market-cap-weighted index when its biggest holdings are rising fastest.
Related: Why Salesforce and ServiceNow could emerge as AI winners
How equal-weight S&P 500 funds can complement Big Tech stocks
Pence’s preference for equal weighting does not mean he has soured on Big Tech.
In the same discussion, he says he would favor Big Tech over the broader market for 2027 and considers a technology sell-off as a buying opportunity. His distinction is between owning technology because an index has become concentrated and owning it because an investor has made a specific long-term investment decision.
That distinction matters because each holding serves a different purpose.
An equal-weight S&P 500 fund can serve as a diversified core, spreading exposure across its components more evenly. Owning a separate position in a company such as Nvidia, Amazon, Broadcom, or Microsoft could provide additional exposure to AI spending, cloud computing, or a company’s competitive advantages.
Pence favors companies that he believes are investing cash to strengthen their competitive advantages.
He describes semiconductor hardware as having a stronger “choke point,” meaning a hard-to-replace position in a supply chain that can support pricing power, than many software companies. He cited Nvidia, TSMC, and ASML as examples of companies that play critical roles in the AI buildout.
However, there are trade-offs.
A separate Big Tech allocation can improve returns if the chosen companies perform well, but it also makes the investor more responsible for selection and position size. Equal weighting does not protect a portfolio from a broad market decline, while a concentrated technology position can increase your volatility during a sell-off.
Related: Could a bond fund warn investors about the next tech selloff?
How to balance S&P 500 index funds and individual Big Tech stocks
Pence’s framework starts with purpose, not a prediction about the market’s next move.
Investors can first decide how much of their stock allocation belongs in a broad-market core. The next decision is whether there is a separate reason to own a particular technology company, beyond the exposure already included in an index fund.
For long-term buy-and-hold investors, that means treating an equal-weight fund as a core holding and limiting individual technology stocks to a level that will not derail their broader investment plans.
A tactical investor may make a different choice, but should recognize that buying a dip in a technology stock is a company-specific decision, not simply a diversified market investment.
Pence also cautions against treating every technology company the same. He prefers companies with a record of execution and investment in future growth, but he says he’s not yet persuaded by Intel’s INTC turnaround story. That’s a reminder that a favorable outlook for a sector does not eliminate the need to assess a company’s competitive position, earnings, and investment strategy.
Investors should also consider cost and performance differences before switching funds.
An equal-weight S&P 500 fund will not mirror the returns of the traditional, market-cap-weighted S&P 500, especially when a few mega-cap stocks dominate performance. The choice ultimately depends on how much concentration an investor is willing to accept.
Related: Why AI investors may need Nvidia and application stocks
Should you invest in an equal-weight S&P 500 fund?
When it comes to your portfolio, first decide whether you want broad U.S. stock exposure, a deliberate long-term Big Tech position, or both.
An equal-weight S&P 500 fund can serve the first purpose, while individually selected technology holdings serve the second.
Then revisit that balance as your investment goals and time horizon change. If a position has grown so large that a disappointing earnings report would unsettle you, it may be time to reduce your concentration or reconsider whether the holding still fits your plan.
Ultimately, Pence’s framework is less about avoiding Big Tech than it is about deciding how much of it you want to own — rather than letting an index make that decision for you.
Sources
Dryden Pence on Street Talk · watch the full segment
Cited segments:
- Pence said 10 stocks accounted for about 40% of the S&P 500 and 50% of the Nasdaq, creating single-stock risk in market-cap-weighted indexes. (27:18–28:43)
- Pence said retail investors who want to sleep better should use equal weighting and choose any concentration themselves. (28:22–28:43)
- Pence favored semiconductor hardware over software because hard-to-replace suppliers have a choke point and pricing power. (8:56–9:48)
- Pence described the technology sell-off as an opportunity and said to buy chips on dips. (5:29–6:16)
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