When investors talk about the market, they're usually talking about the S&P 500 (^GSPC 1.25%). Today, investing in the S&P 500 means having about 40% of your money in 10 stocks.
In other words, stock investing has become incredibly concentrated. The artificial intelligence (AI) boom and the bull market in the "Magnificent Seven" stocks means that many investors are at risk of a deeper drawdown if the market starts moving away from tech. That makes diversification more important than ever.
If you're one of those folks but don't want to drift too far from your current allocation, the Invesco S&P 500 Equal Weight ETF (RSP 1.15%) is worth a strong look.
Image source: Getty Images.
Why it could be the right time for the Invesco S&P 500 Equal Weight ETF
RSP does just what it sounds like: It takes every component of the S&P 500 and weights it equally. Gone are the tech and the Magnificent Seven overweights. Stock 1 gets the same 0.2% weighting as stock 500. What you get is a portfolio that still consists of 500 large-cap stocks, but has an entirely different sector concentration.
In RSP, the top five sector holdings are industrials (15.6%), financials (14.5%), technology (14.4%), healthcare (13.1%), and consumer discretionary (9.4%). That's a significant difference from the cap-weighted S&P 500, where tech has a nearly 35% weighting.
Equal-weighting any index can produce meaningful changes, but that's especially the case with the S&P 500 right now. If you believe that momentum is slowing in tech, the sector is overvalued, or the rally is simply due for a breather, RSP can be a great way to tweak your core portfolio allocation without abandoning large-cap exposure altogether.
NYSEMKT: RSP
Key Data Points
The market is already starting to broaden
Over the past two months, tech has lagged the S&P 500. In its place, cyclicals and healthcare have jumped into the lead. There are a few reasons why this has happened.
First, interest rates have been falling. Given that smaller companies tend to be more debt-reliant, this has been disproportionately benefiting small-caps and even smaller companies within the S&P 500. By extension, this benefits the equal-weight approach as well.
Second, labor market trouble is pointing to economic growth risk. Healthcare is a defensive sector that often leads the S&P 500 when investors get nervous. Healthcare has been the best-performing S&P sector of the fourth quarter by a wide margin.
Third, tech momentum appears to have peaked. The AI boom helped drive big revenue and earnings growth rates, but that growth is starting to slow. That was probably inevitable, but investors tend to get more wary of sectors where growth is slowing. Right now, that's tech.
Equal-weight's built-in discipline
The Invesco S&P 500 Equal Weight ETF allows investors the chance to participate regardless of which area of the market is leading. A lot of investors have enjoyed the ride tech has been on, but it's very unlikely to last forever.
That's why I think RSP is an overlooked winner. It can take advantage of an eventual rotation out of tech, and can reduce portfolio concentration risk.
For investors who want to remain invested in equities, RSP looks like a smart buy right now.
