There's arguably no more important index in the stock market than the S&P 500. Tracking the largest 500 U.S. companies on the market, it has become the market barometer to monitor, reflecting the overall health and performance of the U.S. economy.
Historically, the S&P 500 has done a great job of giving a snapshot of the U.S. economy because the companies it tracked were more evenly distributed across sectors. However, the index has recently become heavily skewed toward information technology because of skyrocketing tech valuations.
With the tech sector making up roughly a third of the S&P 500, many investors (including myself) are beginning to worry that the index is too heavily influenced by big tech stocks. So if you'd like to invest in the S&P 500 while avoiding the high-tech concentration of the standard index, the Invesco S&P 500 Equal Weight ETF (RSP 0.72%) could be a great go-to fund.
How does the equal-weight S&P 500 compare to the standard S&P 500?
The standard S&P 500 is market-cap weighted, meaning larger companies (by market capitalization) account for more of the index than smaller companies. Conversely, the equal-weight S&P 500 ETF essentially gives equal weight to each company in the index (with some slight differences in percentages).
Below is how the standard S&P 500 is currently broken down by sector:
| Sector | Percentage of the S&P 500 |
|---|---|
| Communication services | 9.40% |
| Consumer discretionary | 11.30% |
| Consumer staples | 5.50% |
| Energy | 3.20% |
| Financials | 13.60% |
| Health care | 10.10% |
| Industrials | 8.10% |
| Information technology | 32.50% |
| Materials | 1.90% |
| Real estate | 2.10% |
| Utilities | 2.30% |
Source: Vanguard. Percentages as of Dec. 31, 2024.
Now, let's take a look at the equal-weight S&P 500 ETF, which is much more diversified in its sector representation.
| Sector | Percentage of the ETF |
|---|---|
| Communication services | 3.87% |
| Consumer discretionary | 9.84% |
| Consumer staples | 7.20% |
| Energy | 4.50% |
| Financials | 14.75% |
| Health care | 12.31% |
| Industrials | 15.37% |
| Information technology | 13.99% |
| Materials | 5.41% |
| Real estate | 6.06% |
| Utilities | 6.42% |
Source: Invesco. Percentages as of Feb. 12, 2025.
The tech sector's drop from almost a third of the S&P 500 to roughly 14% of the equal-weight S&P 500 ETF shows just how much of an effect rising tech valuations have had on the index.
High concentration works out in your favor -- until it doesn't
Admittedly, the high concentration of tech stocks in the S&P 500 has worked out in investors' favor in the past decade. During that span, the S&P 500 is up over 190%, while this ETF is up around 120%. However, when you zoom out and look at the performances of the two since the ETF's April 2003 inception, the performances flip.
Just four companies -- Apple, Nvidia, Microsoft, and Amazon -- make up roughly a quarter of the S&P 500, so their performances have a tangible effect on the index. In this ETF, the top four holdings -- Palantir Technologies, Tapestry, Constellation Energy, and Uber -- only make up 1.14% of the fund. That means the ETF's performance relies much more on the overall performance of all S&P 500 companies and not just a handful of mega-cap tech companies.
The ETF has a history of satisfactory gains
Since its inception, this ETF has averaged around 9.5% annual returns. It's not an eye-popping amount, but it's not too far off from the S&P 500's long-term historical average return of 10% annually.
There's no way to predict how the ETF will perform in the future, but if we assume it continues on the same trend, 9.5% annual returns could turn $500 monthly investments into around $317,500 in 20 years, after accounting for the ETF's 0.20% expense ratio.
I wouldn't make the Invesco S&P 500 Equal Weight ETF the bulk of my stock portfolio, but it can be a good hedge against the concentration of the standard S&P 500.
