The beginning of this month has not been great for the S&P 500, which saw a decline of over 7% at one point in March. By April 1st, it had managed to recover slightly, ending at around -4%. This decline isn’t unique to the S&P 500; many major indexes, especially those with significant tech exposure, mirror this pattern.
Given the current economic challenges, many investors might feel hesitant to keep pouring money into the market. This isn’t entirely surprising, though. After all, the S&P 500 tends to fluctuate regularly.
Despite the uncertainty, faith in the S&P 500 index is still warranted. However, looking at it from a different perspective could be beneficial. For instance, in April, the Invesco S&P 500 Equal Weight ETF appears to be a wise choice for investment. It offers an alternative way to engage with the index.
The S&P 500 and its Tech Focus
The traditional S&P 500 is heavily skewed towards larger companies, particularly in tech. In fact, nine of its top ten stocks are tech giants, including Alphabet and others. The so-called “Magnificent Seven”—Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, and Tesla—rightly holds a staggering 33% of the index’s total weight. In contrast, these same companies make up only about 1.3% of the equal-weighted S&P 500 index.
This concentration has mostly worked in favor of the S&P 500 over the last decade, mainly due to the stellar growth of big tech stocks, which outperformed the equal-weighted index significantly. With tech accounting for roughly a third of the S&P 500, the performance gap between the two indexes largely hinges on how well the tech sector is doing.
When tech thrives, the traditional S&P 500 usually follows suit. However, equal-weighted indexes tend to maintain their value better during downturns like what we experienced at the beginning of this year and during the 2022 bear market. For example, the equal-weighted S&P 500 fell only 13% last year, compared to the standard index’s roughly 19% decline.
Approaching the S&P 500 with Caution
Personally, I still favor the S&P 500 for long-term investments and believe it’s a solid choice for many. While I appreciate the hedging advantages of the equal-weighted version, I wouldn’t want it to dominate my portfolio. I think there are certain merits to the traditional market-cap weighting as well.
That being said, if you’re considering investing $1,000 in an S&P 500 ETF, now could be a good time to look at the equal-weighted option. It’s less dependent on tech stocks, has a more appealing valuation, and can help diversify your exposure to the S&P 500 without over-concentration risks.
