VOO Just Crossed $1 Trillion. Here’s the Hidden Risk Nobody’s Pricing In

The Vanguard S&P 500 ETF (VOO) has recently surpassed $1 trillion in assets under management, becoming the first ETF to achieve such a milestone. In doing so, it shows just how dominant passive ETF investing has become over the past two decades.

Driven by lower fees, greater tax efficiency, and consistent long-term performance, VOO has become a primary holding for millions of investors. However, the same forces that helped propel the fund to $1 trillion in AUM are also creating an increasingly overlooked risk for investors.

While investors often think of VOO as a well-diversified way to “own the market,” the fund has become increasingly concentrated in just a handful of mega-cap tech and AI companies. While that doesn’t mean investors should avoid the ETF, it does mean owning the fund results in a portfolio that is less diversified than many might believe.

Bigger Than Ever, But Also More Concentrated

VOO tracks the S&P 500, a market-cap-weighted index that measures the performance of the 500 largest publicly traded companies in the United States. Because the index is weighted by market capitalization, the largest companies receive the largest allocations, and those weights naturally increase as stock prices outperform.

Over the past several years, companies like Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), and Meta Platforms (META) have significantly outperformed the broader market. Much of this outperformance can be attributed to the optimism surrounding artificial intelligence, as these companies are widely viewed as the primary beneficiaries of the AI investment cycle. As a result, these businesses now account for a substantial portion of VOO’s total assets.

Although VOO owns approximately 500 companies (518 total holdings), top 10 holdings now account for more than one-third of the entire portfolio (39.18%), with 38.55% of all holdings in the technology sector.

While on paper, investors own hundreds of businesses across every major sector of the US economy, in practice, portfolio performance is increasingly dependent on a relatively small handful of companies.

Passive Investing Creates a Feedback Loop

This growing concentration isn’t the result of active management or stock picking; rather, it is simply how market-cap-weighted index funds are designed to work.

When investors purchase shares of VOO, new money flows into all 500 companies according to their existing weights. Because the largest companies already occupy the biggest positions, they naturally receive the largest share of every new investment.

If those companies continue to outperform, their weights will grow even larger, creating a self-reinforcing cycle where continued investment success attracts more and more capital.

At face value, this isn’t necessarily a bad thing. In many respects, market-cap weighting has been one of the biggest reasons passive investing has outperformed many (if not most) active managers over long periods. Still, it is important to recognize the risks this causes.

Diversification Is Not Simply About Holding 500 Stocks

Many investors equate owning VOO with maximum diversification. While the fund certainly provides broad exposure to the US equity market, diversification isn’t simply about the number of holdings.

Rather, true diversification also must consider how portfolio returns are generated.

If a handful of stocks account for a disproportionate share of both portfolio weight and performance, investors become increasingly reliant on those companies to continue outperforming.

Should the AI investment cycle slow, valuations compress, or earnings disappoint, the weaknesses in just a few stocks could drag down the entire fund’s returns. Because tech and AI names occupy such a large portion of VOO, weakness among just a few stocks could have a significant negative impact on total returns going forward.

Know What You Actually Own

None of this is meant to suggest that investors should abandon VOO, as the fund continues to be one of the lowest-cost and most effective ways to gain exposure to the U.S. stock market.

However, the fund’s $1 trillion milestone is also a reminder that diversification evolves over time. Today’s VOO is not identical to the VOO investors owned a decade ago. As the market has become increasingly driven by a small group of mega-cap technology companies, so too has one of the world’s most popular ETFs.

For long-term investors, the lesson is not to fear passive investing; instead, it is to understand what you actually own. A portfolio can hold 500 companies and still be more concentrated than it appears at first glance.

For investors concerned about growing concentration risk, other funds can provide broad exposure while avoiding overconcentration in any one sector.  Equal-weighted funds like the Invesco S&P 500 Equal Weight ETF (RSP) reduce reliance on mega-cap technology stocks by giving each S&P 500 company the same equal allocation. Likewise, broad-market ETFs such as the Vanguard Total Stock Market ETF (VTI) provide diversification beyond the S&P 500, including thousands of mid and small-cap companies.

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