A diversified fund manager’s worst fear is operating a portfolio dominated by just seven U.S. megacap tech firms—all clustered in the same economic niche. Yet as the S&P 500 hit new all-time highs this week, investors again faced a harsh truth: Matching the market’s performance has largely required holding little else besides these stocks.
A small, closely connected group of tech giants accounted for a disproportionate share of 2025’s returns, extending a pattern that’s held for nearly a decade. What stood out wasn’t just that the same winners remained in place, but the extent to which this gap began to seriously strain investor patience.
Frustration shaped 2025’s fund flows. Bloomberg Intelligence estimates (using ICI data) show around $1 trillion was withdrawn from active equity mutual funds this year—marking the 11th consecutive year of net outflows and, by some metrics, the largest drop in the current cycle. In contrast, passive equity exchange-traded funds attracted over $600 billion.
The outflows occurred gradually throughout the year, as investors reevaluated whether to fund portfolios that looked significantly different from the index—only to face the fallout when those deviations failed to deliver returns.
“Concentration in these stocks makes it harder for active managers to succeed,” said Dave Mazza, chief executive officer of Roundhill Investments. “If you don’t hold the Magnificent Seven in line with their benchmark weights, you’re likely taking on the risk of underperforming.”
Contrary to analysts who predicted an environment where stock picking would excel, 2025 was a year where the cost of straying from the benchmark stayed stubbornly high.
Narrow Participation
Data from BNY Investments shows that on many first-half 2025 days, fewer than rose alongside the broader market. While narrow market participation isn’t uncommon on its own, its persistence matters: When gains are repeatedly driven by a tiny handful of stocks, diversifying bets stops helping and starts harming relative performance.
The same trend was evident at the index level. Throughout the year, the S&P 500 outperformed its equal-weighted counterpart, which assigns equal importance to a small retailer as it does to Inc.
For investors considering active strategies, this translated to a straightforward choice: Pick a fund underweight the largest stocks (and risk falling behind) or choose one holding them in near-index proportions (and struggle to justify paying active fees for a strategy barely different from passive).
In the U.S., 73% of equity mutual funds have underperformed their benchmarks this year, according to Bloomberg Intelligence’s Athanasios Psarofagis—marking the fourth-highest share since 2007. Underperformance worsened after markets recovered from April’s tariff-related dip, as enthusiasm over artificial intelligence solidified the tech group’s leadership.
There were exceptions, but they demanded investors take on very different risks. One standout was Dimensional Fund Advisors LP’s $14 billion returned just over 50% this year, outperforming its benchmark, the S&P 500, and the 100.
The fund’s structure is revealing: It holds roughly 1,800 stocks, nearly all outside the U.S., with heavy exposure to financials, industrials, and materials. Instead of trying to navigate around the U.S. large-cap index, it largely avoided it altogether.
“This year offers a valuable lesson,” said Joel Schneider, the firm’s deputy head of portfolio management for North America. “Everyone knows global diversification is logical, but staying disciplined to maintain it is extremely hard. Choosing yesterday’s winners isn’t the right approach.”
Sticking With Winners
One manager who stayed true to her convictions was Margie Patel of the Allspring , which has returned some 20% this year thanks to bets on chipmakers Inc. and Inc.
“A lot of people prefer to be closet or quasi-indexers—they want some exposure to every sector even if they don’t believe those sectors will outperform,” Patel said on Bloomberg TV. In contrast, her view is that “the winners are going to stay winners.”
The tendency for large stocks to grow even larger made 2025 a standout year for would-be bubble hunters. The Nasdaq 100 trades at more than 30 times earnings and around six times sales, at or near historical highs. Dan Ives, the Wedbush Securities analyst who launched an AI-focused ETF (IVES) in 2025 and saw it swell to nearly $1 billion, says valuations like those may test nerves, but are no reason to bail on the theme.
“There are going to be white-knuckle moments. That just creates the opportunities,” he said in an interview. “We believe this tech bull market goes for another two years. To us, it’s about trying to find who the derivative beneficiaries are, and that’s how we’re going to continue to navigate this fourth industrial revolution from an investing perspective.”
Thematic Investing
Other successes leaned into concentration of a different kind. VanEck’s returned almost 40% this year, benefiting from demand linked to alternative energy, agriculture and base metals. The fund, launched in 2006, owns companies such as Plc, Corp. and Barrick Mining Corp., and is run by teams that include geologists and engineers alongside financial analysts.
“When you are an active manager, it allows you to pursue big themes,” said Shawn Reynolds, who has managed the fund for 15 years, a geologist himself. But that approach, too, demands conviction and tolerance for volatility — qualities that many investors have shown less appetite for after several years of uneven results.
By the end of 2025, the lesson for investors was not that active management had stopped working, nor that the index had solved the market. It was simpler, and more uncomfortable. After another year of concentrated gains, the price of being different remained high, and for many, the willingness to keep paying it had worn thin.
Still, Osman Ali of Goldman Sachs Asset Management believes there is “alpha” to be found not just in Big Tech. The global co-head of quantitative investment strategies relies on the firm’s proprietary model, which ranks and analyzes roughly 15,000 stocks worldwide on a daily basis. The system, built around the team’s investment philosophy, has helped deliver gains of some 40% across its international large-cap, international small-cap and tax-managed funds on a total return basis.
“The markets will always give you something,” he said, “You just have to look in a very dispassionate, data-driven way.”