For years, broad-market index funds have been the default choice for investors seeking low costs, diversification, and consistent long-term growth. That strategy has delivered strong results across multiple market cycles.

Yet recent market trends are prompting financial advisors to ask a different question: Does passive investing still provide the best path when only a handful of companies are driving most of the market's gains?

As artificial intelligence reshapes industries and market leadership becomes increasingly concentrated, the debate between passive and active investing has gained fresh attention.

Why Passive Investing Is Changing

Broad-market index funds do not pick winners or avoid struggling companies. Instead, they hold every stock included in an index.

Popular exchange-traded funds (ETFs) such as the Vanguard Total Stock Market Index Fund (VTI) and the State Street SPDR S&P 500 ETF Trust (SPY) continue to attract investors because of their low expense ratios of just 3 and 9 basis points, respectively. Still, low fees may come with a trade-off when portfolios include companies that are losing momentum alongside those posting exceptional gains.

Linkedin | The Times | Haley Schaffer notes AI creates distinct market winners and losers, making traditional indexing a risky bet.

Haley Schaffer, founder and managing partner at Waypoint West, believes the market environment has changed significantly.

"The setup that made indexing nearly unbeatable for 15 years was the internet era's tailwind of cheap money, deep liquidity and a tide that lifted almost every boat, but AI may not be that kind of tide."

According to Schaffer, artificial intelligence is creating clear winners and clear losers across industries. Since market-cap-weighted indexes continue holding both groups, investors remain exposed to companies that may struggle as industries shift.

She added:

"That widening gap between the companies that adapt and the ones that get displaced is what brings selection back into play, and not just stock by stock, but also where you allocate, which sectors and which geographies."

Growing Performance Gaps

Performance differences inside major indexes have become unusually large. Although every index naturally contains companies with different returns, recent gaps have attracted growing attention from advisors.

Recent examples include:

1. Sandisk has surged more than 725% this year.
2. Micron Technology has climbed over 280% while the broader S&P 500 has gained only about 9%.
3. Nike has declined roughly 35%.
4. Zoetis has fallen nearly 40%.

Chris Grisanti, chief market strategist at MAI Capital Management, pointed to the growing imbalance within the market.

"The past few months have seen a terribly skewed index, driven by just a few stocks."

Instead of chasing the strongest performers, Grisanti believes investors should focus on avoiding overpriced sectors.

"Being a successful active stock picker is as much about what you choose not to own as what you do own. Perhaps being devoid of the semiconductors that have doubled and tripled in price in the last few months can add a lot of alpha going forward."

Why Advisors Favor Active Management

Several wealth managers believe concentrated market leadership has increased the value of active portfolio management.

Eric Berlin, founder of Edgewood Wealth Management, described the current concentration within major indexes as one of the market's most overlooked risks.

"A small handful of stocks continue to drive a disproportionate share of equity returns."

Berlin also warned about increasing exposure to sectors such as semiconductors, describing them as highly cyclical industries that could introduce additional volatility into passive portfolios.

Kimberly Abmeyer, wealth advisor at Ascentis Wealth Management, shared a similar outlook. Although active investing has always been part of the firm's strategy, current market conditions have strengthened that view.

According to Abmeyer:

"While we have always been active participants in the equity markets, we believe the past one to two years have made it increasingly important to shift from a highly passive approach to a more active one for investors seeking outperformance."

She identified several sectors supported by long-term growth trends, including artificial intelligence, modern defense, robotics, space technology, and energy.

The Case for Staying With Index Funds

Not every advisor believes recent market conditions justify abandoning passive investing.

Chris Rawson, founder of Vision Based Planning, argued that selecting individual stocks often adds unnecessary risk instead of improving long-term outcomes.

"Most individual stock opportunities are just additional risk, and as advisors, our job isn't to find the next winning stock, it's to help our clients reach their financial goals while taking the least amount of risk necessary."

Rawson noted that investors seeking greater risk exposure can still achieve that goal through diversified ETFs and mutual funds rather than relying on individual stocks.

Instagram | Vlada Karpovich | AI and shifting markets are forcing investors to rethink passive indexing versus targeted growth.

Alvin Carlos, financial advisor at District Capital Management, also continues to favor passive investing as the foundation of a portfolio. He believes many investors became overly confident after years of strong technology stock performance.

Carlos explained:

"For the past decade, many individual investors thought it was easy to beat the market by just buying growth and tech stocks where they saw instant returns."

He also pointed out that companies such as Microsoft and Amazon have recently underperformed while international markets have outpaced U.S. stocks over the past year.

Rather than abandoning index funds, Carlos prefers enhancing passive portfolios with factor-based strategies focused on profitability, smaller companies, and attractive valuations.

Rethinking Portfolio Construction

The debate now goes beyond choosing passive or active investing. Many financial advisors are asking a different question. Does traditional diversification still work when a handful of technology companies drive most of an index's returns?

Grisanti believes investor psychology also shapes portfolio decisions.

He said, "When markets are expensive and driven by exuberance, passive investing can become riskier than active investing, and I want to be able to choose what I don't own in times like these."

Schaffer shared a similar view. She stressed that passive investing is not the real problem.

"The case isn't that passive is broken, it's whether owning the index is still the best way to own innovation," Schaffer said.

She explained that innovation is changing entire industries. Investors who own broad indexes automatically hold both the companies leading that change and those losing ground.

Schaffer added, "As innovation takes over the index, passive owns the disruptors and the disrupted together with no way to separate them, and the index quietly stops being diversification and becomes a concentrated bet you never actually chose."

Passive investing remains a low-cost option for long-term investors. However, recent market trends have raised new questions about portfolio construction.

Some advisors now favor targeted investments in sectors with stronger growth prospects. Others continue to rely on diversified index funds to reduce overall portfolio risk.

Artificial intelligence continues to reshape market performance. That shift keeps the discussion around passive and active investing at the center of wealth management.