Big Tech’s Market Grip Tightens, Pushing $1 Trillion From Active Funds

For a diversified fund manager, a portfolio dominated by just seven technology companies is a scenario to be avoided. Yet as the S&P 500 climbed to new records this week, investors once again confronted a painful reality: keeping pace with the market meant holding little else.

A small, tightly-knit group of tech superstocks accounted for a massive share of returns in 2025, extending a pattern that has held for the better part of a decade. What stood out was not just that the winners remained largely the same, but the degree to which the performance gap began to seriously test investor patience.

That frustration has dictated the flow of money. Roughly $1 trillion was pulled from active equity mutual funds during the year, according to Bloomberg Intelligence estimates using ICI data. The withdrawals mark an 11th consecutive year of net outflows and, by some measures, the steepest of the cycle. In contrast, passive exchange-traded funds took in more than $600 billion.

On many days during the first half of the year, fewer than one in five stocks advanced alongside the broader market, according to data compiled by BNY Investments. While narrow participation is not unusual in itself, its persistence is significant. When gains are repeatedly driven by a select few, broader diversification stops helping and starts hurting relative performance.

This dynamic was also visible at the index level. Throughout the year, the S&P 500 outpaced its equal-weighted version, which gives the same importance to a small retailer as it does to Apple Inc.

For investors evaluating active strategies, this created a simple math problem: pick a fund that is underweight the largest stocks and risk falling behind, or choose one that holds them in close proportion to the index and struggle to justify paying for an approach that barely differs from a passive fund.

In the U.S., 73% of equity mutual funds have lagged their benchmarks this year, according to Athanasios Psarofagis of BI, the fourth-worst rate in data dating back to 2007. The underperformance worsened after the market recovered from April’s tariff fears, as enthusiasm for artificial intelligence cemented the tech group’s leadership.

There were exceptions, but they required investors to accept very different risks. One of the most striking came from Dimensional Fund Advisors LP, whose $14 billion International Small Cap Value Portfolio returned just over 50% this year, beating not only its benchmark but also the S&P 500 and the Nasdaq 100.

The portfolio’s structure is revealing. It holds approximately 1,800 stocks, almost all outside the U.S., with heavy exposure to financials, industrials, and materials. Rather than trying to navigate the U.S. large-cap index, it largely opted out.

“This year offers us a very good lesson,” said Joel Schneider, the firm’s deputy head of portfolio management for North America. “Everyone knows that global diversification makes sense, but it’s really hard to stay disciplined and maintain it. Picking yesterday’s winners is not the right approach.”

One manager who stuck to her convictions was Margie Patel of the Allspring Diversified Capital Builder Fund, which has returned about 20% this year thanks to bets on chipmakers Micron Technology Inc. and Advanced Micro Devices Inc.

“A lot of people like to be closet or quasi-indexers. They like to have some exposure in all sectors, even if they’re not convicted that they’re going to outperform,” Patel told Bloomberg TV. In her view, “the winners will stay winners.”