The S&P 500 (^GSPC +0.51%) is one of the best ways for the everyday investor to invest in the stock market. It covers a lot of ground, has blue chip stocks, is cheap, and has proven results. It's been one of the surest ways to build wealth over time, and that's unlikely to change anytime soon.
That said, the current makeup of the S&P 500 looks a lot different than it has historically. While it's still producing good returns, it's fair to wonder whether it's time to look at a different variation of the S&P 500, like the Invesco S&P 500 Equal Weight ETF (RSP +0.40%). If the goal is protecting yourself against one of the market's biggest risks right now, I say it is.
Image source: Getty Images.
The overconcentration risk
The Vanguard S&P 500 ETF (VOO +0.54%) mirrors the S&P 500, and is supposed to give investors broad exposure to the U.S. While it technically does, holding companies from all 11 major sectors, it has become much more top-heavy than it has historically been. Its top 10 holdings account for nearly 38% of the index, meaning for every $1,000 you invest, $38 goes to the same 10 companies (out of 505).
| Company | Percentage of the ETF |
|---|---|
| Nvidia | 8.08% |
| Apple | 7.03% |
| Microsoft | 5.69% |
| Amazon | 3.84% |
| Alphabet (Class A) | 3.01% |
| Broadcom | 2.65% |
| Alphabet (Class C) | 2.39% |
| Meta Platforms | 1.90% |
| Micron | 1.63% |
| Tesla | 1.56% |
Data source: Vanguard. Percentages as of Aug. 31.
The "Magnificent Seven" stocks alone account for over a third of the S&P 500. This high concentration stems from the S&P 500 being weighted by market cap. Larger companies make up more of the index, and big-tech valuations have shot up in recent years amid the current AI boom.
Here's some perspective on how lopsided the index has become: Nvidia's $5.4 trillion market cap is roughly 557 times higher than fellow S&P 500 member Domino's Pizza's $9.7 billion market cap (as of Sept. 25).
S&P 500 Index
Key Data Points
High concentration has worked in the S&P 500's favor in recent years, but it cuts both ways and introduces more downside risk. A pullback from those companies would drag the whole index down. That's not to say there's an immediate risk of that happening, but it's not far-fetched either.
Same companies, different priority
RSP is an alternative that levels the playing field. It lets you invest in the same S&P 500 companies, but instead of giving more weight to larger companies, it gives all companies close to the same weight. Its top 10 holdings look much different than the Vanguard S&P 500 ETF's.
| Company | Percentage of the ETF |
|---|---|
| Moderna | 0.27% |
| CrowdStrike Holdings | 0.25% |
| Illumina | 0.25% |
| Skyworks Solutions | 0.24% |
| Advanced Micro Devices | 0.24% |
| Palo Alto Networks | 0.24% |
| Mettler-Toledo International | 0.23% |
| Intel | 0.23% |
| Revvity | 0.23% |
| Agilent Technologies | 0.23% |
Data source: Invesco.
Instead of being dominated by tech stocks, RSP is much more even across the board. It might not have the same upside that comes with high concentration -- the S&P 500 has nearly doubled its returns in the past five years -- but it also doesn't have the same vulnerability.
If the tech sector struggles, the S&P 500 will inevitably struggle, because that sector makes up 37.9% of the index. Tech is only 14.7% of RSP, so if it struggles, it's not the end of the world. A good example is the 2022 bear market, when the S&P 500 finished the year down 19.4%, while RSP finished down 13.2%.
NYSEMKT: RSP
Key Data Points
You don't have to own only one
RSP has underperformed the S&P 500 over the past decade, but its returns haven't been too shabby. It's averaged 9.7% annual returns (the S&P 500 averaged 13.6%). Since RSP began trading in April 2003, its returns have been comparable to the S&P 500's, up 724% and 742%, respectively.
Only time will tell how it performs over the next decade, but investing in RSP is just as much about limiting your downside as it is about maximizing your upside. Since companies make up much less of RSP, you can invest in both it and a standard S&P 500 ETF without worrying about too much weight overlap.
