Something odd happened on Wall Street in September. The S&P 500 barely budged, yet several stocks in the world’s most popular index traded lower.
The S&P 500 dipped only 0.5% in September, while 78% of the companies saw their share prices fall. Last month, 379 stocks in the index fell, while 124 rose.
The equal-weight S&P 500 index fell 4.8% in September, while the regular index was down just 0.3%.
Further, a report from Fiscal.ai shows that 134 S&P 500 stocks are down at least 40% from all-time highs. More than 50% of S&P 500 stocks are now in bear market territory.
The index is clearly led by a handful of tech giants, as investors remain bullish on the AI megatrend.
So, what does this concentration mean for Canadian investors who own U.S. index funds?
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Why the S&P 500 stood still while most stocks fell
Now look at the iShares NASDAQ 100 Index ETF (TSX: XQQ), which is hedged to the Canadian dollar. The ETF offers you exposure to 102 stocks, which might seem diversified.
However, the top 10 holdings account for 46.3% of the fund. The largest holding is Nvidia at 8.5%, followed by Apple at 7.4% and Microsoft at 6%.
The information technology sector accounts for 58.5% of total holdings followed by communications at 13.7%, and consumer discretionary at 11.1%.
For comparison, Ben Carlson of A Wealth of Common Sense wrote on September 6 that the top 10 stocks make up almost 40% of the S&P 500, up from 17% in 2015. So, the XQQ has an even higher concentration than the S&P 500 index
Why XQQ could be risky for Canadian investors in October 2026
The XQQ ETF trades at a price-to-earnings multiple of almost 40 times, while the price-to-book ratio is also elevated at 9.9 times. These higher multiples require robust revenue and earnings growth to justify them and leave little room for disappointment.
The fund’s past performance shows how sharp the swings can be. The XQQ ETF lost 34% in 2022, then gained 23.5% in 2023).
However, a hypothetical $10,000 investment in May 2011 would have grown to $118,000 by the end of August 2026. It’s clear you need to stay invested long term to benefit from the power of compounding.
Alternatively, when concentration falls, returns have tended to run below average. A rotation toward the rest of the market would leave a top-heavy fund behind.
The Foolish takeaway
If you remain bullish on the AI trade, it makes sense to stay invested in tech-heavy ETFs such as XQQ.
However, the ETF may not replicate its historical returns over the next decade, given elevated valuations, rising debt levels, a challenging macro environment, and possible interest rate hikes.
Investors with a lower risk appetite should consider booking partial profits in equity markets and hedging risk with gold ETFs. Historically, gold prices have risen during significant equity market pullbacks.
Viewed as an inflation hedge, gold offers diversification for Canadian residents and an attractive entry point in October 2026. While the S&P 500 and Nasdaq trade at all-time highs, gold is down almost 30% from record levels.
