A handful of U.S. technology-related stocks have generated exceptional returns over the past decade, making it hard for active equity funds to outperform. If this concentration unwinds, however, Vanguard’s Oversight & Manager Search team would expect active fund managers to fare much better—especially those with strong stock-picking outside these mega-cap tech names.
A decade of U.S. tech stock dominance
Returns for the U.S. equity market have been exceptional over the past decade, as measured by the Russell 1000 Index of large-capitalization U.S. companies. The index gained 13% per year on an annualized basis from 2015 through 2024 compared to 10.1% for the period from 1925 through 2024. By comparison, non-U.S. stocks (as measured by the MSCI AC World Index) and U.S. small-caps (as measured by the Russell 2000 Index) lagged the U.S. equity market over the past decade, gaining just 4.8% and 7.8%, respectively.
Much of the broad market’s performance has been driven by a small number of large technology-oriented companies, which have included “FAANGM” (Facebook, Amazon, Apple, Netflix, Google, and Microsoft) in the past and, more recently, the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla).
As the figure below illustrates, the market-capitalization share of the 10 largest U.S. stocks has grown over the past decade; by 2024, these stocks accounted for almost 30% of the Russell 1000 Index. As a result, the performance drag from not owning those stocks—almost all of which are tech-related—has grown as well. In 2024, not holding the 10 largest stocks would have resulted in a performance headwind of –8 percentage points—the biggest annual drag for the period shown.
Charting the return impact of not owning the 10 largest stocks
Notes: Overall period shown is from December 31, 1990, through December 31, 2024. Impacts shown are as of the end of each calendar year. Weights shown are as of the beginning of each calendar year.
Sources: Vanguard and FactSet.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Large growth funds have been affected the most
Heightened market concentration over the past decade has made it challenging for active funds, particularly large growth funds, to outperform. As the chart below illustrates, large growth funds are generally underweight mega-cap companies and overweight mid-cap, small-cap, and international stocks.
Average weightings of actively managed U.S. large-cap funds vs. their style benchmarks
Notes: Figure shows the average market cap segment exposure for active equity funds in the Morningstar large value, large blend, and large growth categories relative to the corresponding Russell 1000 style index. Morningstar size definitions are used.
Sources: Vanguard, using data from Morningstar and FactSet, as of December 31, 2024.
Several factors contribute to the structural underweight of mega-caps in active large-cap funds:
The relationship between the performance of mega-caps and the percentage of active funds beating their benchmarks over time is negative. However, value managers have performed well by holding the Magnificent Seven, which are not part of their style benchmark.
Share of active funds beating their style benchmark
Notes: The lines show the percentage of actively managed large-cap equity funds outperforming their corresponding Russell 1000 style index before fees on a rolling 3-year basis for the period from December 31, 1993, through December 31, 2024. The oldest share class of each fund was used. The bars show the rolling 3-year performance difference between mega-cap growth stocks and the market. The proxy used to represent mega-cap growth stocks is the Russell Top 200 Growth Index; the proxy used to represent the market is the Russell 1000 Index.
Sources: Vanguard and Morningstar.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Performance attribution helps us account for market concentration and uncover true skill
The analysis that our team has conducted suggests that the headwind from mega-caps is only a small part of the underperformance story for many funds—and that for others, this headwind has masked good stock-picking elsewhere.
The table below shows performance attribution for two existing large-cap core funds benchmarked to the Standard & Poor’s 500 Index from 2014 through 2024. Both underperformed the index over the period, but for very different reasons. Fund A had significant exposure to international stocks (about 13% on average) and was underweight mega-caps (about 14% on average). Combined with a cash drag, these tilts created a headwind of –0.16 percentage points, which masked strong stock-picking within the remainder of the portfolio (+1.4 percentage points). Fund B, by contrast, had minimal exposure to international stocks and only a slight mega-cap underweight; most of its underperformance (almost 2 percentage points) came from poor stock-picking.
Two large-cap core funds underperformed, but for very different reasons
Note: Data are for 2014 through 2024.
Sources: Vanguard and FactSet.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
What past performance suggests about future performance
Should the next decade see mean reversion in U.S. mega-cap performance, as Vanguard’s capital markets outlook suggests, we would expect active managers to fare better in general.
However, not all active funds would benefit equally in such a scenario. Those that, like our Fund A, have had their strong stock selection masked during the last decade by the significant headwinds from an underweight to mega-caps could be poised to perform best. Conversely, those that are more similar to Fund B could continue to struggle. Value funds that have only outperformed through holding out-of-benchmark mega-cap tech stocks could also disappoint.
As investors reassess their active funds for the coming decade, we believe that making these distinctions about what, exactly, is driving an active fund’s performance will be critical.
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