Balancing US Exposure Without the AI Concentration Risk
The explosive growth of AI has powered US markets to new heights, but it has also created an unprecedented concentration of risk. For investors who want exposure to the world’s largest economy without relying so heavily on a handful of tech giants, there are alternative ways to approach the S&P 500.
Is the AI Boom Creating Hidden Risks in US Markets? A Look at Equal-Weighted Strategies
The recent wobble in the AI sector has been a sharp reminder of just how concentrated US stock market exposure has become.
At the time of writing, the S&P 500 – the flagship index for the US market – allocates around 38.1% of its weight to information technology alone. Nine of its ten largest constituents, aside from Berkshire Hathaway, are all directly tied to the artificial intelligence theme. Even Berkshire has exposure through its underlying holdings.
Despite this year’s volatility, the US remains the world’s largest, deepest and most liquid equity market. It’s home to hundreds of globally dominant businesses, and the American economy continues to outperform many others when it comes to productivity. It’s not hard to understand why long-term investors still want US exposure, even if they’re uneasy about how tightly the S&P 500 is now linked to the fortunes of the tech and AI giants.
Could equal-weighted indices offer a solution?
One way to reduce this concentration risk is to look at investment products that track an equal-weighted version of the S&P 500.
Most equity indices are market-cap weighted, meaning the biggest companies influence performance the most. So when a heavyweight like Nvidia – which makes up roughly 7.5% of the S&P 500 – drops sharply, the whole index moves with it. Earlier this year, a 17% fall in Nvidia’s share price translated into a 1.3% swing in the entire index.
Equal-weighted indices work differently. Every company receives the same weighting, regardless of its size. This creates a more balanced spread across sectors, naturally reducing the dominance of mega-cap tech stocks.
What difference does this make in practice?
The impact is clearest when you look at how the sector breakdown changes.
As the chart shows, technology’s dominance falls significantly in the equal-weighted index, with greater representation for areas such as industrials, financials and consumer staples. The result is a portfolio that’s far less dependent on the performance of a small number of AI-linked names.
There are several ETFs available in the UK that track the S&P 500 Equal Weight Index, offering investors a straightforward way to access this approach.
Investors should be aware that these vehicles typically carry higher fees than standard S&P 500 trackers, reflecting the more specialist methodology and frequent rebalancing they require.
How has the equal-weighted index performed?
Performance is another important consideration.
As the chart shows, over the past decade the equal-weighted index has lagged the standard S&P 500, with the gap widening in recent years as large technology companies have led the market. However, if the recent selling pressure in AI and megacap tech continues, the dynamic could shift in favour of a more balanced approach.
The takeaway
For investors who want US exposure but are wary of the increasing concentration in AI-linked names, equal-weighted strategies offer a credible alternative. They won’t eliminate volatility, but they can help create a more diversified and resilient US allocation — especially at a time when the market’s leadership feels increasingly narrow.
Will is an Independent Financial Adviser with over a decade of experience helping expats make the most of their international status.