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Market Update

Is Your Portfolio Too Heavy on Technology Stocks?

There are good reasons behind the sector’s growing dominance, but it warrants some caution.

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Even if you don’t hold any technology stocks or tech-sector funds, your portfolio might be more tech-heavy than you think. The sector now accounts for 24.2% of the S&P 500. Communication services, which is home to tech-oriented leaders such as Alphabet (GOOGL), Facebook (FB), and Twitter (TWTR), made up another 11% of the benchmark as of Oct. 31, 2020. Tech leaders have dominated returns for the index for seven years running; as a result, the largest companies in the index are all big tech names, including Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), and Facebook. (Amazon is officially part of the consumer cyclical sector, but obviously tech-related.) Those five companies alone now account for about 23% of the index’s value.

Because the S&P 500 is such a widely used benchmark, thousands of index funds, exchange-traded funds, and actively managed funds also have large amounts of exposure to the tech sector. While there are good reasons behind tech’s growing dominance, it also warrants a bit of caution. In this article, I’ll delve into what’s been driving the surge in tech stocks, why this is potentially problematic for investors, and how to adjust your portfolio to mitigate the risk.

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Amy C. Arnott has a position in the following securities mentioned above: AAPL, MSFT, EA. Find out about Morningstar’s editorial policies.