The indexes most investors use to track the markets don’t look the way they did just five years ago. Many investors are aware that the major stock market index has become far more concentrated in a handful of companies than it has been in decades, but the bond market has also taken on more concentration and interest rate risk than many investors realize. Both shifts mean that index-based investing, in all of its forms, carries a different risk profile than it did just five years ago. The reasons why and their implications are important and it’s worth understanding why active risk management may make more sense today than ever.
Investors typically view the S&P 500 Index as the proxy benchmark for stock market. It’s packaged and marketed in many forms as instant diversification. Since it holds roughly 500 companies across every major industry, the assumption is that money invested is diversified widely and inherently safer than a more concentrated investment. However, the Index is not equally weighted. Being weighted by size, the biggest companies in the S&P 500 Index count the most, and the largest companies have never accounted for this much. Using the State Street SPDR S&P 500 ETF (SPY) as a proxy for the S&P 500 Index, we can see that the top 10 stocks in the S&P 500 Index now make up roughly 38 percent of the entire Index’s value, which is the highest level of concentration on record (Exhibit 1). This concentration helps explain why active managers have struggled recently relative to their benchmarks. When a handful of stocks are doing most of the work, investments that are not heavily weighted in those same names tend to fall behind no matter how sound their overall strategy may be. In this scenario, diversification becomes a headwind to relative returns.
Similar to the equity benchmarks but getting far less attention, the bond market has gone through its own version of this shift. Using the iShares US Aggregate Bond ETF (AGG) as a proxy for the Bloomberg U.S. Aggregate Bond Index, the benchmark most core bond funds are built around, we can see that the Index now holds close to 45% of its value in U.S. Treasuries (Exhibit 2). That share has grown steadily as the federal deficit has ballooned and the government has had to issue more and more debt to cover it. The federal deficit came in at $1.8 trillion in fiscal year 2025, more than four times what it was a decade earlier, and interest payments on the national debt have now crossed $1 trillion a year for the first time. All of that new issuance has creat
ed a larger concentration of Treasuries in the Index and stretched out the average duration of the bond index, which is a way of measuring how sensitive it is to changes in interest rates. That extra sensitivity arrived at a rough time. The 10-year Treasury yield was around 1.3% in August of 2021 and has since climbed to around 4.7%, one of the sharpest rate increases in a generation. Mortgage-backed securities (MBS), also a major component of the broad bond Index, have made the picture even more complicated. Their yields have jumped from about 3.86% to 5.6% over the same stretch, as refinancing has essentially stopped as homeowners hold onto mortgages they locked in at much lower rates years ago. That matters because mortgage bonds tend to become more sensitive to rate changes exactly when rates are rising, since fewer people are paying off their loans early. So, the bond side of a typical portfolio isn’t just bigger on Treasuries, it’s also significantly higher in duration and therefore more sensitive to rate swings than it used to be.
These shifts have changed the risk dynamics of the markets and may make a stronger case for active risk management than we have seen in a while. Consider that active managers who underperformed the S&P 500 Index over the past several years may have not necessarily made poor calls. Many simply held diversified portfolios that were not overweight in the small group of mega cap names carrying the Index higher, and while those names drove most of the market’s return, that diversification looked like a drag on performance. As the Index itself has grown more concentrated, that same discipline may look less like a weakness and more like strength should we see an uptick in volatility in those concentrated names and sectors. A similar logic applies on the bond side, where managers who actively manage duration or limit exposure to any single issuer are positioning around risks that a passive index simply absorbs by default.
The broad market, and more specifically the indexes used as a benchmark for comparison and as an assumed easy path to diversification across a whole host of investments, now carries very different risk than it did just a few years ago. The S&P 500 Index is more concentrated than it has been since the dot com bubble, and the Bloomberg U.S. Aggregate Bond Index carries more Treasury exposure and more interest rate risk than it had just 5 years ago. Both changes happened gradually, inside benchmarks most investors still treat as a stable, diversified default, and that shift is worth real consideration.
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Shelton Capital Management (Shelton) is a boutique investment firm that helps investors pursue their financial goals through tailored investment solutions and human-centric customer service. Founded in 1985, the company provides mutual funds, ETFs, ETF-based portfolios and separately managed accounts to the clients of wealth managers, retirement plans, and individual investors. As of June 30, 2026, the firm manages more than $7.8 billion in assets across fixed income portfolios, U.S. equity and international equity strategies, ESG solutions, and equity income products leveraging our expertise in options. Over the decades, Shelton has collected awards from established sources such as Morningstar, Lipper, Forbes Advisor, and Pension & Investments. The company continues to add key employee talent and expand their institutional expertise. Shelton is headquartered in Denver, Colorado with additional offices in San Francisco and Memphis. For more information, visit www.shelton.com.
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