Is the Market Concentrated? Defensive Stock Strategies

The short answer is **yes**. As of late $\text{2025}$, the U.S. equity market, specifically the $\text{S\&P 500}$, is exhibiting one of the highest concentration levels in decades. The outsized influence of a handful of megacap technology stocks—often dubbed the **"Magnificent Seven"**—means that the index's performance is heavily dependent on the success of just those few companies. This concentration introduces significant **risk** to diversified investors.

The Problem: Concentration Risk in the S\&P 500

Market capitalization weighting, the method used by the $\text{S\&P 500}$, means the largest stocks dictate the index's direction. When these stocks perform well, the index soars. When they falter, the entire market feels the drag, even if the other $\text{493}$ companies are stable.

The Exposure Data Point

In November $\text{2025}$, the combined weighting of the top $\text{7}$ technology companies in the $\text{S\&P 500}$ stands near $\mathbf{30\%}$. Historically, high concentration periods have often preceded periods of market volatility and rotation. If one of these giants suffers regulatory setbacks, an earnings miss, or a structural threat, the impact on the average index-tracking portfolio is immediate and severe.

3 Defensive Strategies to Counter Concentration

The goal is not to abandon the market, but to balance the high-growth, high-risk exposure with assets that perform differently. Here are three immediately actionable defensive strategies.

1. Invest in Equal-Weight ETFs

The most direct way to counter market concentration is to switch from a cap-weighted index fund to an **Equal-Weight** index fund.

How it Works

• **Cap-Weighted (S\&P 500):** The largest company might represent $\mathbf{7\%}$ of the index, and the smallest only $\mathbf{0.01\%}$.
• **Equal-Weight (e.g., RSP ETF):** Every one of the $\text{500}$ companies is given the same weighting (approx. $\mathbf{0.2\%}$).
• **Defense:** This strategy provides true diversification. It reduces your dependence on the $\text{7}$ megacap stocks and increases exposure to mid- and small-cap stocks, which may thrive during a market rotation. This protects the portfolio when market leadership shifts away from the technology giants.

2. Focus on Low Volatility and Quality Factor ETFs

When volatility is high (which concentration exacerbates), owning stocks that historically exhibit lower price swings can protect the downside of your portfolio.

The Low Volatility Edge

• **Low Volatility Funds (e.g., USMV):** These ETFs select stocks with historically lower volatility metrics, often tilting toward defensive sectors like Utilities, Consumer Staples, and Healthcare. They sacrifice some upside but significantly cushion losses during drawdowns.
• **Quality Factor:** Look for companies with strong balance sheets, high return on equity ($\text{ROE}$), and stable earnings. These metrics indicate resilience and can be accessed through specific Quality factor ETFs.
• **Defense:** These stocks typically perform better than the broader market when high-flying growth stocks (the $\text{Magnificent 7}$) pull back sharply.

For sector-specific defense against non-market risks, check out our analysis on How Falling Commercial Real Estate Impacts Your Bank.

3. Overweight Defensive Sectors Directly

If you prefer buying individual stocks or sector ETFs, increase your allocation to businesses whose revenues are **non-cyclical** (less dependent on the economic cycle).

Sectors for Stability

• **Consumer Staples:** Companies that sell everyday essentials (food, hygiene products). People buy these regardless of recession fears.
• **Healthcare:** Demand for medical services, pharmaceuticals, and devices is inelastic. These companies provide stable earnings and cash flow.
• **Utilities:** Regulated power and water providers offer stable, dividend-paying income with high barriers to entry, making them classic defensive plays.

**Defense:** These sectors provide a necessary counterbalance to the momentum and growth focus of the current market leaders.

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The high concentration of the U.S. stock market is a powerful momentum trend but also a structural vulnerability. Implementing defensive strategies—whether through equal-weighting, low-volatility funds, or sector rotation—is an essential step in protecting your long-term wealth from potential shifts in market leadership.

Want our full list of defensive ETFs and their holdings?

Download our free $\text{2025}$ Defensive Portfolio Blueprint, including tickers for Equal-Weight and Low-Vol funds.

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