Weekend Reading: Magnificent Concentration Edition
A reader wrote this week asking a timely question: many of us are in that stage of our financial lives where sequence-of-returns risk looms large, and it feels like our portfolios are increasingly at the mercy of a handful of tech giants.
The question was whether it’s possible to reduce or eliminate exposure to the “Magnificent Seven” stocks without abandoning the diversification benefits of broad-based ETFs.
Let’s start with what’s driving that concern. The combined market value of the Magnificent Seven (Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla) now tops $19 trillion, representing roughly 36% of the S&P 500’s $54 trillion market capitalization.
That’s more than double their 2022 weight and triple their share eight years ago. By late 2025, the top 10 stocks together made up close to 40% of the index, surpassing the dot-com era’s high-20 percent concentration and marking the most top-heavy market in modern history. Nvidia alone carries about an 8% weight in the index.
That kind of dominance shows up in ETF lineups. In a plain-vanilla S&P 500 tracker like VFV or VOO, those three largest names – Nvidia, Microsoft, and Apple – account for more than 21% of total holdings.
In a global all-equity fund such as VEQT or XEQT, the same three make up only about 7.5%, because exposure is spread across Canada, international developed markets, and emerging markets. That’s the beauty of global diversification: it naturally dilutes single-country and single-sector risk.
For investors who still want to take concentration down another notch, there are a few options:
Equal-weight ETFs like Invesco’s S&P 500 Equal Weight ETF (RSP) hold the same companies but give each one the same influence, rebalancing quarterly. This reduces single-stock risk but introduces higher turnover and can lag badly when mega-caps dominate, as they have in 2023-2025.
Ex-Mag 7 ETFs go a step further. Defiance’s Large Cap Ex-Mag 7 ETF (XMAG) simply removes those seven names. That’s a bold bet – it might protect you in a downturn, but you’ll underperform whenever the leaders keep leading.
There’s even direct indexing, a newer strategy that Wealthsimple now offers to retail investors. Instead of owning a fund, you hold dozens or hundreds of the individual stocks that make up an index. It allows for tax-loss harvesting, customization, and the ability to dial down exposure to specific companies (the most obvious being your own employer's stock).
The trade-offs are higher costs, complexity, and the potential for tracking error if you exclude the wrong names.
Still, my boring default answer remains the same: own the world with a single global equity fund like VEQT or XEQT. You’ll still capture the winners, but no one company (or seven) is likely to make or break your portfolio.
And here’s the twist that often gets overlooked. Research by Hendrik Bessembinder shows that just 4% of stocks are responsible for all the net wealth creation in the stock market. Miss those winners and your long-term returns suffer far more than you gain by avoiding a few laggards.
Even if today’s valuations feel stretched, trying to outguess which companies will drive the next generation of returns is a fool’s errand.
So, the takeaway for this weekend: it’s fine to feel uneasy about the Magnificent Seven’s grip on the market, but diversification – not exclusion – is the antidote.
Spread your bets globally, keep costs low, and let the next batch of market leaders reveal themselves in time. For retirees and soon-to-be retirees, pair that with a cash wedge to help you facilitate regular withdrawals and avoid selling stocks in a downturn.
This Week's Recap:
In the last edition of Weekend Reading I looked at points, planes, and permission to spend.
Next, I reviewed the new and fully updated classic, The Wealthy Barber and 81 of you entered to win a free copy of the book by leaving a comment about when you read the original and the impact it made on your life.
Mr. Chilton himself said he enjoyed reading all of the comments. Wow!
Congratulations to Wendy Ni le, who left a comment on November 5th at 8:09 a.m. I'll contact you today and make arrangements to send you a free copy of The Wealthy Barber.
Promo of the Week:
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If you're in the market for a new iPhone 17 it's starting at $1,129. And, depending on the MacBook you're looking at paying at least $1,299.
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- Transfer or deposit $100,000+ into almost any account within 30 days
Remember, when transferring accounts from one institution to another I want you to keep in mind my Las Vegas analogy:
“What happens in your registered account stays in your registered account. You’re just moving across the street to a cheaper hotel with better amenities. You’re still in Vegas.”
This applies to all registered accounts (RRSP, RRIF, LIRA, LIF, TFSA, RESP, etc.).
Open an account at Wealthsimple, open the appropriate account type(s), initiate the transfer(s), and Wealthsimple’s back office contacts your existing bank’s back office to request the transfer. This is a federally regulated event and happens every day, and no break-up conversations need to be had at all.
Weekend Reading:
Investor memories of past performance are distorted, research finds. Preet Banerjee explains why that’s a problem.
Russell Sawatsky with a great piece on why index investors keep acting like stock pickers:
“The edge investors have been seeking has been there all along. It does not come from betting on narrow sectors but from embracing simplicity, discipline, and patience.”
More Canadians should consider delaying CPP and OAS to 70 in exchange for higher guaranteed, paid-for-life, inflation-protected benefits. But to many retirees the choice feels too much like a gamble with death. Retirement researcher Bonnie-Jeanne MacDonald developed a simple yet brilliant solution called a Pension Delay Guarantee. In plain language: If you delay and die early, the guarantee ensures you don’t lose out.
Markus Muhs' chart of the month looks at the CAPE ratio, which is approaching its high during the dot com bubble, and what investors should do about it:
“The CAPE ratio doesn’t predict crashes; it simply reminds us that markets move in cycles. Lower your long term expectations for market growth, in particular for U.S. equities.”
I really enjoyed this article on the guilt of having money – when financial success feels uncomfortable.
To celebrate book launch day, Dave Chilton invited Preet Banerjee to host The Wealthy Barber podcast and interview Dave. Here's his origin story:
A Wealth of Common Sense blogger Ben Carlson says stocks are not at dot-com nosebleed levels just yet but the past 10 years are right in line with Japan and the Roaring 20s.
Finally, enjoy this visual masterpiece (and excellent article) by Erica Alini on why the era of the shoebox condo is over and how Canada can build livable apartments to help solve the housing crisis.
Have a great weekend, everyone!
Timely as I had the same concern about my portfolio as I’ve suddenly found myself facing a possible unplanned retirement and suddenly need to worry about risk
Thanks for your comment, Brad. Really sorry to hear about this uncertainty you’re facing. The good news is that a few small tweaks – like holding more cash or trimming equity exposure – can go a long way toward reducing stress and protecting your plans.
I immediately cashed out my USD small cap value which had been going to the moon this year (especially global, but even US) so I think I’ve reduced my asset allocation to fairly close to 60/40 and I split the cash between HISA and XSB as short and mid term holding). Still have a mix of VBAL and XEQT and then a 2040 glidepath with employer (about 70/30 mix).
Hi Robb
Looking to hear thoughts on being 80% invested (78% VXC and 2% in a local MIC)
Holding the rest approx 20% in cash/cash-like as a “market dip ready” fund.
Retirement horizon is 7-10 years. Feel like I’m holding too much cash but also s*** scared of present ATH valuations!
Rick
Hi Rick, glad to see you’re back into the market. I don’t think it’s wise to hold cash for the sole purpose of buying a future dip. Ben Felix took a deep dive on that a few years ago and found this approach was sub-optimal compared to being fully investing or dollar cost averaging in over time: https://pwlcapital.com/buy-the-dip/
It’s important to know that even the worst market timing strategy (buying at ATHs) has still produced pretty good outcomes.
Great memory! You remember your readers comments wow Robb! I did buy into the ‘dip’ the block head down south had caused a couple weeks ago.
I do agree with Ben and yourself about DCA’ing into the market and will probably deploy most of the remaining cash like suggested.
Thanks for the reaffirmation and today’s post was equally timely as wife and I were just discussing how the mag-7s have been driving US equities into crazy territory but hey who am I to say what’s crazy and what’s ordinary!
But getting to think of it still wondering why Buffett has been stockpiling historic levels of cash (25-30% last est.), I do get he plays at a very different level, has a liquidity focus and lump when it dumps strategy although he himself said DCA is the way to go.
With Buffett, it’s a case of “do what I say, not what I do”. His personal investing philosophy and activity on behalf of Berkshire should have absolutely no bearing on regular average Joe investors. We’re not even playing the same game.
Hi Robb,
I always look forward to weekend to read your interesting insights on investing.
I have a question for you regarding the MER in VEQT.
If I purchase each of these ETFs individually in similar allocations as in VEQT, I get:
VUN 46% x MER 0.17% = 0.078%
VCN 30% x MER 0.05% = 0.015%
VIU 17% x MER 0.23% = 0.039%
VEE 7% x MER 025% = 0.0175%
That would add up to only 0.1495% MER.
But VEQT MER is listed as 0.24%.
0.24% – 0.1495% = 0.0905%
Therefore 0.0905 /0.1495 = 60.5% more❗️I know Vanguard automatically reset the allocations automatically in VEQT but is it worthwhile to pay over 60% for this service?
I did not include the foreign withholding tax of 0.24% in this discussion.
Looking forward as always to your insights.
Thank you,
Jeff
Hi Jeff, thanks for this. Vanguard introduced these asset allocation ETFs to solve a dilemma for DIY investors who were either struggling to hold and rebalance a portfolio of 4-7 individual ETFs, or for want-to-be index investors who just found that whole process completely overwhelming.
With one-click, you own 13,000+ global stocks in one “rebalanced for you” fund.
Is that worth paying an extra $9 for every $10,000 invested? I’d say so.
But for investors who are more than comfortable breaking apart VEQT into the four individual ETFs to save the fees, I’d say go for it. Just know that the likelihood of tracking error is probably pretty high since you’re not going to be rebalancing daily.
VEQT does not rebalance daily. They rebalance when drift exceeds 2%, so not often.
All asset allocation ETFs effectively rebalance daily with fund flows (i.e. new investor money coming in goes into the lagging funds). Yes, they all have a target policy for managing drift when daily fund flows don’t get the job done, but it’s more tax efficient for the fund to do it with new money coming in.
That’s true but investors also have fund flows (whether in accumulation or de-accumulation phase), so the exact same situation. We also get distributions which go into underweight assets – same as Vanguard. Which is why actual rebalancing is rarely needed.
Deviation from regional allocation of <5% have little impact on returns.
I think this more of an issue of discipline and psychological tendency of investors to temper with assets that is a potential concern – rather than the technical issue of needing to rely on on Vanguard for daily rebalancing.
Hi Robb, PWL posted about this last year too. Same conclusion of simplicity over potential (small) increase in return. I think most see as they get older simplifying and refocusing energy is the goal. We’re still working on your plan to help us do that but getting there. Hope all is well.
Hey Robb, your link to Bonnie-Jeanne MacDonald’s “Pension Delay Guarantee” article requires a Globe & Mail subscription (which I don’t have). Is this available elsewhere?
Thank-you
Hi Kevin, here’s a gifted link from G&M for this article (sorry, I didn’t see a “for subscribers” on this one): https://www.theglobeandmail.com/gift/69649e79bee91a6aea299eeda25d8a0301280e28d6f07d8be241d0f38cf5d2cf/RBSLCYRBQ5CBLMLXPXSZVLBMVE/
That link can be clicked 20 times before it expires – so apologies to the 21st person…
Also, the proposed change to CPP discussed in this G&M article is from a large report from the National Institute on Aging
https://www.niageing.ca/cpp-qpp-step7
Thanks so much Robb! Too bad this guarantee isn’t yet approved & available.
Good post.
I do have this concern. Mag7 make up 10 -15% of VEQT. Closely correlated big US Tech makes up a lot more. Which means that we are not as diversified as we think we are.
Like you say, excluding them isn’t the right answer. My personal answer is to allocate 30% of US market to small cap value and 70% to VTI.
Technology in general makes up nearly 25% of VEQT (Shopify is the second largest allocation after NVIDIA).
The small cap value tilt makes perfect sense. The trouble is that it hasn’t performed very well compared to the broad market because these large cap stocks keep growing. So you need a lot of conviction to stick with an underperforming strategy.
And while many investors think this is a bubble and similar to the dot com crash, the fact is those companies had a ton of debt and no revenue (prices soaring on hope) while the big tech giants are making money hand over fist.
I won’t pretend to be smarter than the market by betting on something different – and I know myself enough to know I’d have regrets if it didn’t work out the way I thought.
Not to say what you’ve done, and what Brad S has done (above) isn’t sensible – I think it makes perfect sense!
Agreed. I have used this 30% allocation to small value for years and like you say it has hurt returns but still makes me more comfortable. I am focusing on risk/return balance. For the same reason I have 30% in fixed income while realizing asset diversification isn’t the way to maximize returns. Not necessarily the best solution but thats fine.
I don’t have a view on whether its a bubble or not. I just stick with the plan.
Not worried about a bubble, in fact I am cheering for one. A ton of money can be made in one. Bring it on!!!
I sold all my VEQT and replaced with ZEQT, lower mer and Canadian. Go Canada.
Hi Robb,
Regarding Wealthsimple have you heard if PRIF’s are on their radar at all? We’d appreciate transferring the remainder of our investments & have asked several times without a commitment. Thought you might have some sway…
Always enjoy your practical weekly articles, thanks,
Rozanne
Hi Rozanne, I have not heard if that account is available (or even is it is on the managed portfolio side, though I suspect it is).
I have no sway, unfortunately 🙂
Looking to take the plunge and transfer our assets over to Wealthsimple, but wondering if we can do it piecemeal and take advantage of these different offers as they come up? Like if we only transferred over $100k to get a phone today, can we transfer over more later to get one of the other promos, such as the cashback?
Of course. Assuming they’ll have other offers. Which is likely. We started moving across to WS a couple of years ago and they almost always have an offer on. At that time they didn’t have all of the account types we required but they do now. We are very happy with WS.
Thank you for confirming!
As Mordko said, yes you can. The only complication is with partial account transfers. Last time we did that (this March), we still had to go through WS’s customer service instead of being able to do it automatically online as is the case for full account transfers.
Appreciate your feedback, and I will keep this in mind!
Hi Robb, I enjoyed this article and it gave me some thoughts to consider. If I want to shift out of my VFV and favour more in VEQT/XEQT/ZEQT I assume I am best to make that transition sooner rather than later and get out while prices are up? Also what should I consider when choosing between those 3?
Hi Kaitlyn, yes – it would make sense to do this reallocation while the market is up (assuming you’re talking about registered accounts with no tax implications for selling).
VEQT holds slightly more Canadian equity and more emerging market equity, while XEQT has more US equity and more international equity.
Last I checked ZEQT uses an S&P500 ETF for its US equity while VEQT and XEQT use total market ETFs for their US equity. For me, that would disqualify ZEQT.
Here’s a great video comparing VEQT and XEQT: https://youtu.be/ZlmzFsZoV_o?si=4L-ui2HN3fFBGQdc
Yes, within my TFSA. And thank you, both your comment and video were helpful! I sold my VFV and opted VEQT instead. Thanks!
This is a good reminder that we can’t get too focused on the market giants. Let your financial plan be your guide, and if you don’t have one, get one! Corrections will happen and there’s still no way to know when or by how much. Keep Calm and Carry On with a risk-appropriate asset allocation ETF. This is the Way 🙂
Hi Robb, I was wondering how Wealthsimple compares to Questrade with respect to ease of use. I am helping my very non-techy son set up a TFSA and I am only familiar with Questrade. He would be doing all transactions on a phone. Thanks!
I’ve had accounts with both platforms and much prefer the usability of Wealthsimple – easier to navigate, more options to automate (dividends, recurring contributions AND ETF purchases).
If you had more sophisticated needs (managing multiple ETFs, currency conversion with Norbert’s Gambit, etc.), then Questrade would be a better choice.
Hi Heather, I made the transition from Questrade to Wealthsimple last year and it was virtually seamless. The app is very easy to use as well. Happy with my experience so far and as Robb mentioned, if your son’s needs aren’t overly sophisticated it should be more than adequate.
Hi Robb. New reader today, and have enjoyed the conversation. Newly retired and planning on organizing our RRSP soon to be RRIF. I see that you recommend VEQT, XEQT type allocation with a 1-2 year cash wedge . I wonder how this lines up with the traditional recommendation for a retired portfolio ie: 60/40 (XBal, Vbal) with 1-2 years cash wedge. I read that VEQT, VGRO too aggressive for a retired portfolio.
@D Smith – thanks for your comment. I’d take a look at this research that suggests a higher equity allocation is optimal versus the traditional investing lifecycle where you get more conservative as you age: https://boomerandecho.com/weekend-reading-veqt-and-chill-edition/
As I tell my clients, as much equity risk as you can stomach.