Navigating concentration risk in a top-heavy market

Index concentration was a central theme at this year’s Schwab IMPACT conference in Denver, Colorado. In particular, advisors are grappling with how to avoid undue risk as a bull market powered by a narrow list of names barrels ahead.

Chris Murphy, head of ETF specialists at T. Rowe Price, outlined a clear strategy to help advisors manage this risk and highlighted where ETF innovation is pushing the envelope: the use of derivatives.

T. Rowe Price is leveraging derivatives to achieve specific outcomes, such as income generation and downside protection, and has launched several products in this space, including covered call and hedged equity strategies.

These approaches, once confined to institutional portfolios or complex fund structures, are now accessible through liquid, transparent ETFs. For many advisors, this marks a shift in how they can implement sophisticated strategies without adding operational complexity.

“These aren’t brand-new strategies—they’re just newly available in the ETF wrapper,” Mr. Murphy said. “That makes them easier to use and integrate alongside traditional passive holdings.”

In a market increasingly dominated by a handful of mega-cap names, Mr. Murphy sees active management as a counterbalance to index concentration.

“Active managers can more effectively navigate concentration risk,” he said. “And in sectors like technology, where innovation spans multiple industries, active ETFs can provide better exposure than rigid, rules-based benchmarks.”

Companies such as Netflix, Amazon and Tesla blur the lines between sectors, but active managers can move beyond index definitions to build more accurate, forward-looking exposure to themes like artificial intelligence.

International markets draw renewed attention

Global diversification is also making a comeback. According to Mr. Murphy, 2025 marks a turning point where lack of international exposure has become a performance drag for many U.S.-focused portfolios.

“There’s a real appetite to revisit international allocations,” he said. “Structural changes outside the U.S., along with currency and rate regime differences, are creating opportunities that active managers are well-positioned to capture.”

Rather than overweighting entire regions, Mr. Murphy emphasized the importance of stock selection. “Diversify globally but narrow through conviction-level picks. That’s where active can add real value.”

Why pay more?

Skeptical advisors might still wonder why they should pay active fees when passive strategies have worked well. Mr. Murphy believes the answer lies in access and efficiency.

“A lot of these ETFs, whether it’s active sector investing or derivatives-based ETFs, are doing something that a lot of advisors can’t or aren’t willing or able to do,” he said. “And I think that’s where you continue to see growth, innovation and adoption among advisors.”

That operational simplicity, combined with outcome-oriented tools, has fueled rapid growth in the space. With portfolio demands becoming more nuanced, Mr. Murphy sees a clear case for pairing passive core holdings with selective active ETFs to meet client goals more precisely.