Markets entered 2025 facing significant concentration risk. Indeed, 2024 saw almost half of its performance owe the Magnificent Seven. 2025 also produced some major concentration risk. YCharts found that by last month, just 2% of S&P 500 constituents produced almost 40% of the index’s total performance.
See more: 3 Takeaways From T. Rowe Price’s 2026 Outlook
Investors have likely looked to diversify throughout the year and entering this one, but still, concentration risk is a big issue. Much of that risk stems from the megacap tech companies expected to continue to deliver big returns. So what can advisors and investors do?
Active investing provides some powerful solutions. Where simply tracking the broad market indexes will replicate much of that concentration risk, active can help. Yes, investors can consider small-cap or value passive options, but they, too, have problems, risking lower performance. By contrast, active equities strategies can offer both diversification and strong returns.
Consider, for example, how a broad market active ETF may differ from a similar, S&P 500 passive strategy. Active ETFs generally apply bottom-up portfolio construction to identify potential investments based on fundamental research.
While such funds do often include bigger firms that pose some of this concentration risk, their other investments meet those fundamental metrics and often add outperformance compared to their rivals. That diversifies active funds away from too much broad market exposure.
At the same time, active management helps a strategy adapt if those big firms face major challenges. AI companies will be expected to star delivering serious revenue this year; active strategies can adapt if some of them don’t meet those goals. Where passive funds must track their indexes, active can adjust if needed — a powerful advantage in such a concentrated space.
Funds like the T. Rowe Price Capital Appreciation Equity ETF (TCAF ) aim for capital appreciation with that active approach. For those looking to continue to refresh their portfolios, active funds merit a closer look.
For more news, information, and analysis, visit our Active ETF Content Hub.
