Is Concentration Causing Investors to Fear the Market-Weighted Index?

Giving everyone their fair share just got more popular.

Fears of an AI bubble and high levels of market concentration may be sending investors to more diversified options. Earlier this month, Invesco’s S&P 500 Equal Weight ETF (RSP) surpassed $100 billion in assets under management and has brought in more than $12 billion this year alone, per a CNBC report. RSP and other equal-weight funds give the same value to each of their underlying stocks rather than mirroring an index. To investors, they can represent a welcome reprieve from the S&P 500, which derives around a third of its value from the tech sector alone. The trend could signal a change in how investors think about the role that S&P 500 funds play in a portfolio.

“Right now, we’ve got the Mag Seven about 34% of the total S&P 500 index, which is at historic levels,” said Don Cody, CEO at Global Macro Asset Management. “I think [equal-weight fund popularity is] largely fear and concern that we’re overweighted in areas that are obviously the drivers of the market.”

Weighing the (Equal) Options

There are a few dozen equal-weight ETFs that invest across broad market indexes and more narrowly defined sectors, although RSP is the biggest and most popular. That fund has also outperformed the S&P 500 year to date, causing investors to take note — especially those who remember the Great Recession, Cody said. “We’ve been here before with the tech boom, the housing boom,” he said. “This is oftentimes symptomatic of a topping market. That’s not to say it can’t go higher, it certainly could … But is there room for concern? Absolutely.”

The next three largest equal-weighted index ETFs after RSP, according to ETF.com, are:

• The Invesco S&P 500 Equal Weight Technology ETF (RSPT), which has about $5.8 billion in assets and is up 42% year to date.
• The Invesco S&P 100 Equal Weight ETF (EQWL), which has about $2.8 billion in assets and is up 14% year to date.
• The Goldman Sachs Equal Weight US Large Cap Equity ETF (GSEW), which has roughly $2 billion in assets and is up 13.7% year to date.

All My Eggs In Many Baskets: Equal-weight funds aren’t the only option for the concentration-wary investor, however. Some thematics, like defense tech, have relatively low overlap with the index and can allow investors to remain in high-performing sectors without betting everything on one strategy, said Pedro Palandrani, head of product research and development at Global X ETFs.

“For investors concerned about concentration, [thematics are] an opportunity to maintain a core allocation while adding exposure driven by different long-term trends rather than simply re-weighting the same crowded names,” he said. “The key is to look through the label and understand the actual overlap.”