Most investors looking for an S&P 500 (^GSPC 2.64%) exchange-traded fund (ETF) end up with the same candidates: the Vanguard S&P 500 ETF, the iShares Core S&P 500 ETF, or even the State Street SPDR Portfolio S&P 500 ETF. That approach has been a winner for years. The challenge today is that the tech rally has made the S&P 500 less diversified than many investors assume.
A handful of megacap tech stocks, such as Nvidia, Apple, and Microsoft, have pushed the sector's allocation to 35%. That means buying a traditional S&P 500 ETF increasingly means making a large bet on a small number of stocks.
A more diversified option may be better. For investors looking to tilt away from tech, the Invesco S&P 500 Equal Weight ETF (RSP 1.42%) is worth considering.
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A different way to invest in the S&P 500
This fund owns the same companies as the S&P 500. The difference, of course, is that each stock receives equal weight. Market cap-weighting, which we see in the familiar version of the index, allows the largest companies to dominate. Equal weighting helps this fund spread out sector allocations and diversify away some concentration risk.
The S&P 500 has continued to push to new highs, but it's been a heavily tech-driven rally. It's been justified as first-quarter earnings growth was strong and artificial intelligence (AI) development continues to produce positive results. But as that rally has continued, the S&P 500 has become more of a concentrated bet on the sector. Those not in the "Magnificent Seven," such as Dell, Sandisk, and Western Digital, have also delivered mind-boggling returns this year, further emphasizing the sector's ability to become overweight in the S&P 500.
NYSEMKT: RSP
Key Data Points
The Invesco S&P 500 Equal Weight ETF maintains a meaningful tech presence but brings the overall index composition into better balance. The top sectors for the fund currently are tech (16%), industrials (16%), financials (16%), and healthcare (11%). You don't give up on tech exposure altogether, but it does become more modest.
The U.S. equity market rotation earlier this year demonstrates why it makes sense to spread out your large-cap investments. As the market grew less optimistic about rate cuts and the Iran war sent investors to safer value opportunities, previous laggards turned into leaders. Energy, materials, small caps, and value stocks all had their moments. A diversified approach paid for investors even though tech has come back strongly in the second quarter.
Why the equal-weight S&P 500 ETF makes sense now
The Invesco S&P 500 Equal Weight ETF comes with a modestly more attractive valuation. Its forward price-to-earnings (P/E) ratio of 17 is about 15% lower than that of the S&P 500.
But the macro case might be the stronger one. The Iran war shows no signs of ending. Inflation could hit 4% very soon. The Fed is unlikely to cut rates this year. And labor market growth has shown signs of stagnation.
Tech is powering corporate earnings growth, but there are signs of a slowdown elsewhere. A portfolio heavier in defensive and value stocks could be the better choice here.
If you're investing $500 today and looking for a solid long-term investment at an attractive entry point, the S&P 500 is always a strong choice. But don't ignore the potential of an equal-weight S&P 500 ETF instead.
