The tax rules for regulated investment companies impose their own quarterly diversification tests. As U.S. cap-weighted indexes have become increasingly concentrated, regulators have shown a willingness to accommodate index funds that exceed traditional diversification limits when that concentration results from following the index methodology. Related:Direct Indexing, Structured Notes Help Advisors Manage Index Fund Concentration RiskIn other words, the fund may be permitted to remain true to the index even when the index itself becomes less diversified. If diversification rules exist to protect investors from concentration risk, should the answer really be: “except when the concentration comes from an index?” That could mean issuer caps, modified cap weighting, diversification bands or clearer labeling when an index crosses meaningful concentration thresholds.