Breaking Up With Big Tech Is Hard to Do. How to Truly Diversify.

The S&P 1500 isn’t really much different from the S&P 500, a new report shows. (David Paul Morris/Bloomberg)

It’s no secret that the darlings of AI—the Mag Seven and Broadcom —dominate the S&P 500. So you figure the S&P 1500 will surely let you diversify more—with its small-caps, midsize stocks, and, of course, the megacaps.

Well, think again. The S&P 1500 isn’t really much different from the S&P 500, a new report shows.

The 10 stocks that are the largest in the S&P 500—the eight tech biggies plus Warren Buffett’s Berkshire Hathaway and JPMorgan Chase —are the same 10 that are the largest in the S&P 1500, according to DataTrek Research.

Those names make up 40.5% of the S&P 500’s market weighting and just slightly less—37.5%—of the S&P 1500’s market cap.

And if you think you can get more sector diversification from the S&P 1500 by owning an exchange-traded fund like the SPDR Portfolio S&P 1500 Composite Stock Market ETF …well, sorry again.

Tech stocks make up 35.2% of the S&P 500 and 33.7% of the S&P 1500, DataTrek points out. At the other end of the spectrum, the materials sector is barely represented in either index: 1.8% of the S&P 500 and 2% of the S&P 1500.

“While it may feel more conservative to cast the broader net of the S&P 1500, the difference to the 500 is negligible in most ways that matter,” wrote Nicholas Colas, DataTrek’s co-founder. “This is largely a function of a highly concentrated US equity market, something we don’t see changing in the coming years.”

Wall Street’s preoccupation with colossal companies shows up in how the indexes perform, too, Colas noted.

The S&P 500 is up about 13% this year, slightly better than the S&P 1500’s 12.3% gain. But the gap between large-caps and the rest of the market is wider over a longer stretch. The S&P 500 is up 233.2% over the past 10 years while the S&P 1500 has gained 222.4%.

Still, Colas doesn’t think you should ignore small- and midsize companies because of the slightly lower returns.

“We do not begrudge anyone owning the S&P 1500 over the S&P 500,” Colas wrote, noting that “the performance drag is not terrible, after all, and avoiding the risk of missing the occasional small cap rally is a worthwhile feature for many investors.”

This year, small-caps have been on a roll. The benchmark Russell 2000 index is up 12.8% this year and set a record high on Tuesday, closing at 2495.50. The S&P Small Cap 600 hasn’t gained as much, but it is up 3.2%, according to FactSet.

Indeed, the small-cap rally might have legs.

Katie Stockton, of Fairlead Strategies, points out the red-hot Russell 2000, which has lagged behind the broader market for the past few years, is a sign that small-caps may very well have some real momentum they can build on.

Stockton, Fairlead’s founder and managing partner, couldn’t be more direct. The Russell 2000 has “positive short-term momentum” and is showing “no signs of exhaustion.”

Jose Marques is CEO of Intech Investment Management, which runs a large-cap ETF and a ETF of small- and mid-caps. Right now, he likes smaller stocks more. “Given the level of concentration that we have in the S&P 500, that seems prudent. The AI trade is a freight train,” he told Barron’s.

The Intech S&P Small-Mid Cap Diversified Alpha ETF’s top holdings include Sprouts Farmers Market, lighting technology company Universal Display, commercial real estate firm Jones Lang LaSalle and egg producer Cal-Maine Foods.

Valuations are more attractive for smaller and midsize stocks, too.

The S&P Small Cap 600 and S&P Mid Cap 400 trade for just 14.5 and 15.6 times 2026 earnings estimates respectively, compared with a multiple of 21.3 times forecasts for the S&P 1500, whose price-to-earnings ratio is inflated by the large-caps in the index.

“Small-caps, on a relative basis to large-caps, look cheap. There is still tremendous value,” Nathan Moser, senior portfolio manager at Impax Asset Management, told Barron’s.

Moser likes financials such as Victory Capital Holding, Acadian Asset Management, and Eastern Bankshares. All three trade for 10 to 11 times 2026 earnings estimates.

So there are ways for you to truly diversify with small- and mid-cap stocks.

Just don’t count on another passive index ETF to do the trick. Chances are, it has as much exposure to AI as the S&P 500.

Write to Paul R. La Monica at paul.lamonica@barrons.com