Investing in the S&P 500 has been one of the simplest strategies to produce the best returns over the past decade. And it requires no stock picking. By simply investing in the largest U.S. stocks, investors have captured a roughly 15% average annual return over the past decade.
But that performance comes with an asterisk. Over the past 10 years, the S&P 500 index has grown progressively more concentrated and riskier. As it stands currently, roughly 40% of the Vanguard S&P 500 ETF (VOO +0.61%) is invested in tech stocks. Nearly 40% of index assets are also committed to just the top 10 holdings, including Nvidia, Apple, and Microsoft.
That's as high a concentration in this supposedly diversified index as we've ever seen. Translation: Investors are highly exposed to a sudden or deep correction in tech stocks. That's not to say investors shouldn't continue to use the S&P 500 as the core of their portfolios -- just that they may want to approach it in a different way.
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Why equal-weighting the S&P 500 is better than market cap-weighting
By choosing an equal-weight exchange-traded fund (ETF), such as the Invesco S&P 500 Equal Weight ETF (RSP +0.55%), you maintain your U.S. large-cap equity exposure, but you gain a more diversified investment.
The top sectors for this fund are industrials (17%), tech (15%), financials (15%), healthcare (12%), and consumer discretionary (9%). The remaining six S&P 500 sectors all have allocations of 4% to 7%. It's an outstanding mix of growth, defensive, and cyclical exposures with no obvious gaps.
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Key Data Points
The other big advantage of the Invesco S&P 500 Equal Weight ETF is risk reduction. The sector mix helps to mitigate idiosyncratic risk, but share price volatility is also meaningfully lower. In a market where share prices have risen for three-and-a-half years with minimal disruptions, and a handful of megacap tech names have been driving it, that kind of volatility reduction can help protect principal.
That could come in very helpful in this bifurcated economy. On one hand, S&P 500 earnings growth is strong and should be supportive of higher stocks. On the other hand, inflation is above 4%, consumer sentiment is near record lows, and geopolitical risks are elevated. There's clearly a world where stock prices could decline if any one of these factors escalates.
The Invesco S&P 500 Equal Weight ETF allows you to maintain your U.S. equity exposure while tilting it in a slightly more conservative and diversified direction. That could be useful in a lot of tech-heavy portfolios today.
