The S&P 500 (^GSPC +0.72%) is, perhaps, the most closely followed stock index in financial markets. It's often used as a benchmark for investors, particularly those focused on large-cap U.S. stocks. So, it might be surprising to find that an exchange-traded fund (ETF) that invests in the exact same stocks that comprise the S&P 500 index is actually performing better than the index itself.
The Invesco S&P 500 Equal Weight ETF (RSP -0.30%) has gained 16% year to date as of this writing. By comparison, the S&P 500 is up 13%. Here's why the ETF is outperforming and, more importantly, why it could continue to do so.
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A different type of S&P 500 index fund
The S&P 500 is a market-cap-weighted index. That means the big tech stocks that have soared during the past few years, like Nvidia and Alphabet, have more weight in the index than smaller, out-of-favor companies, like Domino's Pizza or Clorox.
The S&P 500 equal-weight index aims to track the average return of all the stocks in the S&P 500. Nvidia, with its $5.5 trillion market cap, gets the same weight in the index as Domino's and its $11 billion market cap. The index is rebalanced quarterly, when the S&P 500 adds and removes constituents.
Here's what that means for investors. In bull markets led by just a handful of large companies, as we saw in 2023 through 2025 with artificial intelligence (AI) stocks, the S&P 500 will outperform its equal-weight counterpart. However, when more companies participate in the bull market, the equal-weight index outperforms. The same is true in reverse; concentrated bear markets lead to worse performance for the cap-weighted index. As such, the equal-weight index can sometimes have lower volatility.
This year has seen the bull market broaden out to smaller companies. The "Magnificent Seven" stocks that led the market in recent years have produced worse returns as a group than the S&P 500 has so far this year. Meanwhile, smaller companies are outperforming. That trend can continue.
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Key Data Points
There's still room for the ETF to keep outperforming
The S&P 500 remains heavily concentrated in its top stocks. The top eight companies in the index have a cumulative weight of nearly 36%. All of those stocks are closely tied to artificial intelligence.
The equal-weight index allows you to maintain some exposure to AI stocks, while adding diversification in many sectors that haven't fully participated in the bull market in the previous three years. Financial stocks and materials present great investment opportunities, but a traditional S&P 500 index fund will underweight them relative to their growth potential. There are even opportunities within tech stocks; many software stocks look attractive but receive only a small weighting in the cap-weighted index.
Broader participation in the bull market is a strong sign that the S&P 500 can continue to move higher. However, more of that move higher will come from smaller companies catching up with the growth of the larger companies if the rally is going to continue. That favors the equal-weight index. On the other hand, if the stock market collapses, the likeliest culprit is that concerns about AI overspending begin to materialize in the income statements, revenue growth, and management commentary of megacap companies. That would weigh more heavily on the big tech stocks that currently make up the bulk of the S&P 500, again favoring the equal-weight index.
At the same time, it doesn't make sense to abandon the AI trend. Investing in the Invesco S&P 500 equal-weight ETF ensures you maintain some exposure to the biggest AI stocks while diversifying into undervalued companies in the index. That should produce better returns with less volatility.
