Investing in the S&P 500 has historically been a good strategy for investors. A simple buy-and-hold approach to the index can generate solid returns in the long run.
The index is composed of 500 of the largest public U.S. companies, which makes it broad and diversified. However, because it is market-cap weighted, its value is heavily concentrated in the largest of those companies. And because many exchange-traded funds (ETFs) that track it follow that same formula, they are too.
The list of such funds includes the popular SPDR S&P 500 ETF (SPY 1.07%). Its top three holdings -- Nvidia, Microsoft, and Apple -- together account for around 22% of its portfolio. This level of concentration may be a problem for you as an investor, particularly if you're concerned that megacap tech stocks may be overpriced and due for declines in the near future.
One way to reduce your risk from that possibility would be to look at ETFs that weight their holdings differently, giving you exposure to the index's wide array of companies, but with a less lopsided balance. Two that you may want to consider today are the Invesco S&P 500 Revenue ETF (RWL 0.47%) and the Invesco S&P 500 Equal Weight ETF (RSP 0.70%).
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Invesco S&P 500 Revenue ETF
As its name suggests, this Invesco fund tracks the S&P 500, but weights its positions in stocks based on the companies' revenues. It also has a maximum weight of 5% per stock, ensuring that no single holding accounts for an excessive slice of the portfolio.
Today, the top three holdings in the fund are Amazon, Walmart, and Apple. Those three combine to make up just over 10% of the ETF's portfolio, making it an attractive alternative to the SPY ETF. The one downside is that the Invesco S&P 500 Revenue ETF has an expense ratio of 0.39%, higher than the SPY ETF's expense ratio of just over 0.09%. Over time, the fees a fund charges investors can add up, sapping their returns. However, for risk-averse investors who are looking for a safer investment overall, the trade-off here may be well worth it.
NYSEMKT: RWL
Key Data Points
This year, the SPDR S&P 500 ETF has risen by around 17% while the revenue-tilted Invesco fund has climbed by a more modest 14%. That may seem underwhelming, but the payoff for accepting those weaker results could come if we enter an off period for the market, potentially due to the inflated valuations of tech sector powerhouses.
In 2022, when the stock market crashed and the SPDR S&P 500 ETF fell by 19%, the Invesco S&P 500 Revenue ETF declined by less than 8%. Because it has less exposure to high-priced growth stocks, this fund offers some protection to your portfolio during downturns, but still benefits from the market's overall growth in the long run.
Invesco S&P 500 Equal Weight ETF
If you want an even simpler way to get balanced exposure to the S&P 500 companies, then you may want to consider the Invesco S&P 500 Equal Weight ETF. In this fund, all stocks have about the same weightings. While those positions naturally shift over time as share prices rise and fall, they are rebalanced back to equality on a quarterly basis.
The largest holding in the ETF right now accounts for 0.35% of the fund's portfolio, and that's Warner Bros. Discovery. But generally, the stocks are very similarly weighted; there won't be materially greater exposure to one over another. The downside of this approach, however, is that whether a stock is the best performing growth stock in the S&P 500 or the worst one is irrelevant -- investors in the Invesco S&P 500 Equal Weight ETF have about the same exposure to both.
But if you want a quick and unbiased way of getting equal exposure to each stock in the index, then it's a good option to consider. The fund's expense ratio of 0.2% is also lighter than that of the S&P 500 Revenue ETF.
NYSEMKT: RSP
Key Data Points
This year, the Equal Weight ETF is up around just 7%, lagging behind both the SPY ETF and the S&P 500 Revenue ETF. And while it offers more diversification, it declined by 13% in 2022 and proved to be a worse option than the revenue-weighted ETF that year. That doesn't mean things will always play out that way, but it's an important factor to consider, as diversifying to the extreme in a fund where every stock is weighted the same may not result in a much less risky investment overall.
However, both of the ETFs listed here could make for attractive alternatives to the conventional approaches used by most S&P 500 index funds, which have left investors more heavily exposed to stocks with inflated valuations.
