Key Takeaways:

• Mega-caps drive sector returns, but most ETFs can't fully own them. Regulatory caps force funds to underweight the companies that matter most.
• The 25/5/50 rule creates a hidden gap in sector exposure. Investors may think they own the sector, but caps quietly reshape what they actually hold.
• TruSector ETFs use a hybrid structure to close that gap. TRUT, TRUD, TRUC, TRUF, and TRUH deliver uncapped market-cap exposure while staying RIC compliant.

The Role of Mega-Cap Companies in Sector Returns

The U.S. equity market looks very different than it did even five years ago. A small group of mega-cap companies now account for an outsized share of their sectors' market capitalization, earnings, and returns.

The technology sector is the clearest example. As of early 2026, tech represents over 43% of the S&P 500's total market capitalization and roughly 36% of its earnings. Within the sector, the concentration is even more lopsided: NVIDIA, Apple, and Microsoft make up a huge portion of the information technology sector's total weight. In consumer discretionary, Amazon and Tesla hold similarly dominant positions, and in communication services, Alphabet and Meta Platforms tower over the rest.

This isn't a coincidence. These companies are the engines of sector performance. In 2025, information technology and communication services together accounted for over 63% of the S&P 500's total return. Without those two sectors, the index would have returned roughly 6%.

For investors who want targeted sector exposure, the takeaway is simple: capturing the performance of these leading companies isn't optional. Any sector strategy that systematically underweights them is going to face meaningful performance drag.

How RIC Diversification Caps Distort Sector Exposure

Most ETFs in the United States are structured as Regulated Investment Companies (RICs) under the Internal Revenue Code. This structure lets funds pass through income and gains to shareholders without paying corporate-level tax. But to qualify, RICs must meet quarterly diversification tests, commonly known as the 25/5/50 rule:

• No single company can represent more than 25% of the fund's total assets.
• All positions exceeding 5% each cannot, in aggregate, exceed 50% of the fund.

These rules exist to protect investors from excessive concentration risk. For broadly diversified portfolios, they're a non-issue. But in today's concentrated sectors, they create real distortions.

Look at technology. In an uncapped, true market-cap representation of the tech sector, NVIDIA and Microsoft alone can account for over 40% of the sector's weight. RIC rules don't allow that. So a traditional tech sector ETF has to scale those names back and push that weight into smaller companies that contribute far less to sector performance.

What does this mean in practice? Investors who buy a traditional technology sector ETF may think they're getting full, representative exposure to the sector. But they're actually holding a portfolio that's been reshaped by regulatory constraints, one that underweights the companies driving returns and overweights names with a smaller economic footprint.

Sector-by-Sector Breakdown: Where Capping Hurts Most

The distortion from RIC caps isn't the same everywhere. It hits hardest in sectors where a few large names make up the bulk of the market cap.

Information Technology: Tech is the most affected sector. Names like NVIDIA, Apple, Microsoft, and Broadcom command a huge share of the sector's market cap. Capping forces traditional sector funds into a structural underweight relative to these companies' true market-cap weight. On the surface the portfolio looks like the tech sector; underneath, it behaves quite differently.

Consumer Discretionary: Mega-cap e-commerce and retail names, most notably Amazon and Tesla, drive the majority of this sector's performance. Under capping rules, their influence gets diluted, and exposure shifts toward smaller retailers and consumer companies that contribute less to overall returns.

Communication Services: A small number of streaming, social media, and digital advertising companies dominate this sector, including Alphabet, Meta Platforms, and Netflix. When these names get capped, benchmark alignment breaks down, introducing performance drag and unintended tilts toward less impactful holdings.

Across all five sectors, the pattern is the same: the companies that investors most want exposure to are exactly the ones that regulatory caps force funds to underweight.

Tracking Error and What It Means for Sector Investors

The practical cost of RIC-driven capping is tracking error, or the volatility of the gap between a sector fund's performance and that of an uncapped sector benchmark, many investors often follow.

For asset allocators and model portfolio managers, tracking error is more than a technical footnote. It chips away at the precision of portfolio construction. If a sector allocation is meant to express a specific market view (say, a conviction in technology's growth trajectory) the effectiveness of that view depends on the fund closely mirroring the actual makeup of the sector.

Traditional capped sector ETFs often fall short here. Redistributing weight away from mega-cap leaders and into smaller names introduces stock-level biases and performance differences that compound over time. What looks like a clean sector bet may carry embedded distortions that quietly erode its effectiveness.

For investors who care about attribution clarity and precise exposure, reducing tracking error relative to uncapped benchmarks is a real, tangible improvement.

The Case for True Market-Cap Sector Investing

If the goal of sector investing is to capture the economic reality of a market segment, then the approach should reflect how that sector actually exists in the marketplace, not an artificially capped version of it.

True market-cap sector exposure means holding each company at its natural weight, as the market determines it. When NVIDIA represents a significant share of the technology sector's value, the portfolio should reflect that rather than capping it at an arbitrary threshold and redistributing the difference into smaller positions.

This matters for several practical reasons. It produces cleaner attribution, since returns tie more directly to true sector dynamics rather than capping’s unanticipated consequences. It cuts down on unintended stock-level biases, making sector investing more precise. And it aligns the portfolio with the actual performance drivers of the market instead of a regulatory approximation of them.

As sectors have become more concentrated, fueled by the scale advantages and AI-driven growth of mega-cap tech and platform companies, the gap between capped and uncapped sector exposure has only widened. For allocators building portfolios around sector views, closing that gap matters more now than it used to.

Accessing Precise Sector Exposure with VanEck TruSector ETFs

VanEck's TruSector ETFs were built to address this structural problem. The suite currently includes five actively managed ETFs targeting the sectors most affected by capping distortions:

• VanEck Technology TruSector ETF (TRUT): Full market-cap exposure to the information technology sector.
• VanEck Consumer Discretionary TruSector ETF (TRUD): Full market-cap exposure to the consumer discretionary sector.
• VanEck Communication Services TruSector ETF (TRUC):Full market-cap exposure to the communication services sector.
• VanEck Financials TruSector ETF (TRUF):Full market-cap exposure to the financials sector.
• VanEck Healthcare TruSector ETF (TRUH): Full market-cap exposure to the healthcare sector.

Each fund uses a hybrid structure that combines direct equity holdings with positions in targeted sector ETFs. The funds hold individual sector stocks up to the maximum allowed by RIC rules, then pick up supplemental exposure through other sector ETFs. Because RIC diversification rules don't "look through" to the underlying holdings of other RICs, those positions do not count toward issuer concentration rules. The result is funds that can offer the economic exposure similar to an uncapped sector benchmark while staying fully RIC compliant.

In practice, this means TruSector ETFs maintain uncapped exposure to each sector's leading contributors (or detractors), avoid the overallocation to smaller names that may plague traditional sector funds, and deliver tighter tracking relative to widely followed benchmarks, all with the operational simplicity and liquidity that ETF investors expect.

For asset allocators who want to express sector views with greater accuracy, VanEck's TruSector ETFs offer a sharper tool for portfolio construction in a market that keeps getting more concentrated.

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