Index Funds Are No Longer the Neutral Default

The S&P 500 and the Bloomberg U.S. Aggregate Bond Index are the two most common default settings in investing, but the defaults have moved. As ETF Trends reports, using the SPDR S&P 500 ETF (SPY) and the iShares US Aggregate Bond ETF (AGG) as proxies, the ten largest companies in the S&P 500 now account for roughly 38 percent of the index's total value, the highest concentration on record, while the bond benchmark carries close to 45 percent of its value in U.S. Treasuries. Five years ago, neither index looked like this, and the current shape leaves index-based portfolios with a risk profile the fund names do not advertise.

The S&P 500 is weighted by market value, so the largest companies count the most, and their weight has never been this high. That concentration helps explain why active managers have struggled recently relative to their benchmarks: when a handful of names are doing most of the work, any portfolio not heavily weighted in those same names tends to fall behind no matter how sound the overall strategy may be. In this setting, diversification itself becomes a headwind to relative returns.

The bond market version of the same trend has gotten less attention. The Treasury share of the Aggregate Index has grown as the federal government has issued more debt, and the cost of that borrowing has climbed with it; the federal deficit was $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 crossed $1 trillion for the first time. New issuance has also stretched the benchmark's average duration, the standard measure of how sensitive a bond portfolio is to changes in interest rates.

A bond ETF built on the Aggregate Index is still a broad investment-grade fund, but with close to 45 percent of its value in Treasuries, its performance now depends heavily on federal fiscal policy and on the path of interest rates. The longer average duration means the fund will react more to any given rate move than it did in the past, and that added sensitivity arrived at what the article calls a rough time.

The benchmark itself has become a position. Buying SPY is in part a bet on the market's largest companies keeping their outsize weight, while buying AGG is in part a bet on heavy Treasury issuance being absorbed and on rates not moving sharply. Those can be reasonable bets, but the risk lies in making them by default and then describing the result as diversified. An index fund spreads stock-specific risk across hundreds of names, yet it leaves the risk that the index itself is concentrated untouched.

Active risk management may make more sense today than ever, the article suggests. For investors who remain passive, the equivalent step is less comfortable: recognize that benchmark concentration and duration are active choices, and make sure they are the choices you meant to make.