Just 10 Stocks Make Up Nearly 40% of the S&P 500. Here's an ETF That Can Help You Diversify.

An S&P 500 Index (SNPINDEX:^GSPC) fund, such as the Vanguard S&P 500 ETF (NYSEMKT:VOO), is widely considered one of the easiest ways to build a diversified portfolio. However, there's a catch: Just 10 stocks account for nearly 40% of the index's value. That's up from only 17% in 2015 and is its highest level since the mid-1960s.

That concentration leaves investors increasingly dependent on a handful of technology giants to drive their returns. One way to reduce that risk without abandoning the S&P 500 is to add an ETF such as the Schwab International Dividend Equity ETF (NYSEMKT:SCHY), which offers exposure to a very different set of companies. Here's how it can be a great complement to a top ETF like VOO.

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The S&P 500 isn't as diversified as you think

The S&P 500 has become the standard investment benchmark. The index tracks 500 of the largest publicly traded companies in the U.S. These companies represent about 80% of the total value of the U.S. stock market. That has made S&P 500 tracking funds like the Vanguard S&P 500 ETF very popular investments because they enable you to passively capture most of the stock market's gains.

With 500 holdings across all stock market sectors, the S&P 500 provides broad diversification. However, the index weights holdings by market cap, giving the largest companies the greatest influence on its returns. Due to the growth of many of the country's largest technology companies over the past decade, the fund has significant concentration at the top. VOO's top 10 holdings currently represent over 39% of the fund's total value, led by Nvidia at 8.4%. If there's a major tech-related growth slowdown, the S&P 500's returns would suffer.

What SCHY brings to a portfolio

The Schwab International Dividend Equity ETF offers investors something entirely different. This ETF tracks an index (Dow Jones International Dividend 100 Index) comprising high-yielding dividend stocks from companies outside the U.S. The index screens international companies based on several dividend quality factors, including dividend history, financial strength, and lower volatility.

As a result, the Schwab International Dividend Equity ETF offers investors three distinct benefits that make it an ideal complement to VOO:

1. International diversification: SCHY owns companies across markets such as the United Kingdom, France, Switzerland, Australia, and Italy. Its holdings include Roche, Unilever, TotalEnergies, and others.
2. Different sector exposure: SCHY has very little technology exposure (just 3.4% of the portfolio compared to 39.7% for VOO), with greater emphasis on industrials (15.3% vs. 8%), consumer staples (15.3% vs. 4.4%), and financials (14.9% vs. 11.4%).
3. More dividend income: SCHY's recent yield is around 3.7%, compared with approximately 1% for VOO.

SCHY's international and sector diversification can help lower your portfolio's risk profile. Meanwhile, its focus on lower-volatility holdings and dividend income also helps reduce risk and volatility.

However, there are some trade-offs to consider. SCHY's holdings are lower-growth. Meanwhile, with only 100 holdings, it's also more concentrated (its top 10 holdings account for 40% of its value, though with much greater sector diversification). Additionally, it carries foreign exchange risk.

An ideal complement

VOO is a great core long-term holding for investors, given the S&P 500's average annual return of around 10%. However, its current high allocation to tech stocks could make it more volatile in the future. Adding SCHY could provide a valuable combination of international diversification, additional dividend income, and exposure to businesses largely overshadowed by the tech giants that dominate the S&P 500.

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Vanguard S&P 500 ETF. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.