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The S&P 500, recognized as a critical gauge of the health of the U.S. stock market, encompasses the 500 largest publicly traded companies in the United States. This index serves as a vital reference point for assessing stock performance as well as evaluating exchange-traded funds (ETFs) both in the U.S. and globally.
Recent events, particularly the announcement of new tariffs by President Donald Trump, have introduced a wave of volatility that has affected the S&P 500. Investors are voicing concerns about potential increases in costs, diminished consumer spending, and an elevated risk of recession in response to these economic changes.
Amid this landscape of uncertainty, the S&P 500 remains a robust investment option. However, given the current market dynamics, investors may explore an alternative strategy by investing in the Invesco S&P 500 Equal Weight ETF (RSP 0.38%), which may provide a different risk profile.
^SPX data by YCharts. Year-to-date percentage change as of April 14.
The S&P 500’s Top-Heavy Composition
One of the primary characteristics of the S&P 500 is its market capitalization-based weighting system, where larger companies have a more significant influence on the index’s performance than their smaller counterparts. This structure, while historically standard, has led to an increasingly top-heavy index, particularly due to the soaring valuations of mega-cap firms in the technology sector over the past few years.
To illustrate, here’s a comparison of the representation of the S&P 500’s top ten holdings in both the standard S&P 500 and the equal-weight ETF:
| Company | Percentage of S&P 500 | Percentage of Equal-Weight ETF |
|---|---|---|
| Apple | 7.24% | 0.19% |
| Nvidia | 6.07% | 0.20% |
| Microsoft | 5.85% | 0.21% |
| Amazon | 3.93% | 0.19% |
| Meta Platforms | 2.88% | 0.18% |
| Alphabet (Class A) | 1.97% | 0.11% |
| Berkshire Hathaway | 1.87% | 0.22% |
| Broadcom | 1.84% | 0.20% |
| Alphabet (Class C) | 1.62% | 0.09% |
| Tesla | 1.62% | 0.21% |
Data source: Vanguard and Invesco. S&P 500 percentages as of Feb. 28. Equal-weight percentages as of April 11.
There is a significant contrast between having ten companies account for 34% of the index and them making up only 1.8% in the equal-weight variant. This disparity amplifies both benefits during market upswings and risks during downturns. As of April 14, nearly all top 10 stocks in the S&P 500 have seen declines, impacting the overall index’s performance.
Mitigating Concentration Risks with the Equal-Weight ETF
The equal-weight ETF offers a solution to combat concentration risk, particularly relevant with the prominence of ‘Magnificent Seven’ tech stocks. As various sectors brace for the implications of tariffs under the Trump administration, technology, heavily reliant on imports from countries like China and Taiwan, may be especially vulnerable.
While there is optimism regarding the tech sector’s long-term growth prospects, investors may consider diversifying towards dividend-paying and value stocks amid ongoing tariff-related apprehensions. The equal-weight ETF provides a more balanced sector exposure, contrasting sharply with the skewed representation in the standard S&P 500:
| Sector | Equal-Weight S&P 500 ETF | Standard S&P 500 |
|---|---|---|
| Industrials | 15.79% | 8.3% |
| Financials | 14.69% | 14.5% |
| Information technology | 13.31% | 30.7% |
| Health care | 11.82% | 10.8% |
| Consumer discretionary | 10.02% | 10.5% |
| Consumer staples | 8.02% | 5.9% |
| Utilities | 6.52% | 2.4% |
| Real estate | 6.09% | 2.2% |
| Materials | 5.10% | 2% |
| Energy | 4.31% | 3.3% |
| Communication services | 4.03% | 9.4% |
Data source: Invesco and Vanguard. Equal-weight percentages as of April 11. S&P 500 percentages as of Feb. 28
The S&P 500 aims to capture a comprehensive snapshot of the U.S. economy, while the equal-weight ETF strives for a more equitable distribution of sector representation, preventing a skewed focus on a handful of tech giants.
Performance of the Equal-Weight ETF Compared to the S&P 500
Opting for the equal-weight ETF doesn’t necessitate sacrificing potential for substantial growth. Since its inception in April 2003, the equal-weight ETF has outperformed the conventional S&P 500 index.
While the traditional S&P 500 should form the cornerstone of most investment strategies, incorporating the equal-weight ETF may provide a valuable hedge against the concentration risks characteristic of the standard S&P 500.
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