Investing in the S&P 500 is normally a sound long-term strategy. But this year, while its valuation has been rising 23%, that has largely been due to seven stocks. Known as the "Magnificent Seven," the following big tech stocks have been leading the rally in 2023: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.

The concern for many investors may be that as these tech stocks have achieved significant gains this year, their valuations have become inflated. That means they could be vulnerable to swings in the other direction next year, and that could mean that mirroring the S&P 500 may not be as strong a strategy heading into 2024.

But there is one intriguing option that may reduce some of that risk for investors.

An equal-weighted fund can help balance the overall risk

If you are investing in the S&P 500 and buying shares of a fund that mirrors the index, that means you're also mirroring its makeup. Your exposure to the Magnificent Seven could make you vulnerable if there's a sell-off in tech next year. This could happen if investors grow wary of the valuations, or if the hype surrounding artificial intelligence begins to die down.

One alternative may be to seek a fund that invests in the same stocks on the S&P 500 but assigns them an equal weight. This way, investors aren't overly exposed to the Magnificent Seven or any other overvalued growth stocks. A fund that gives investors this option is the Invesco S&P 500 Equal Weight ETF (RSP 0.05%).

Greater diversification... at the cost of better returns?

The obvious drawback of a more diversified approach to investing in an equal-weighted S&P 500 fund is that you'll have relatively the same exposure to Apple's stock as you will to Hasbro or Whirlpool, which currently account for just 0.02% of the S&P 500's weighting. Apple, by comparison, represents 7.3% of the S&P 500.

This means that as the top tech stocks are soaring, you could be missing out on greater returns. But on the flip side, if those stocks are struggling, you could be avoiding deep losses. That's the usual trade-off when it comes to diversification -- less risk, but potentially worse returns.

This year, with tech stocks doing well, investors would be better off going with the S&P 500 ETF Trust (SPY 0.95%), which mirrors the S&P 500. It is up 23% this year, while the Invesco Equal Weight ETF has increased by just 10%. It was a different story last year, however. Amid falling valuations for growth stocks, SPY's valuation declined by more than 19%. The Invesco fund, however, fell by a more modest rate of 13%.

Is an equal-weighted fund the right option for you?

In good times, tech stocks and growth stocks normally perform well. That's why going with a fund such as SPY may still be the best option for long-term investors. But if you are looking for a way to hedge and diversify next year, especially if you're concerned about big tech, then the Invesco Equal Weight ETF could be a more stable investment to put in your portfolio.