The term S&P 500 is often used synonymously with “market,” but there are key differences that investors should keep in mind.
While the U.S. market features around 8,000 stocks, including ETFs, the S&P 500 consists of just 500 stocks. These are all U.S.-based companies that meet certain criteria, such as a market capitalization of at least $22.7 billion.
This index is weighted, meaning that a company’s impact on the index is proportional to its market capitalization. So, when the S&P 500 shifts, the largest companies can strongly sway that movement. Currently, tech stocks play a big role.
The Vanguard S&P 500 ETF (VOO 1.21%) is the largest ETF globally, boasting $1.7 trillion in assets. Even Warren Buffett has endorsed it, having owned shares in Berkshire Hathaway. However, Invesco S&P 500 Equal Weight ETF (RSP 1.50%) might be a more advantageous buy. Here’s why:
Key Stocks Influence the Index
The Vanguard ETF mirrors the S&P 500, functioning as a weighted ETF that trades in sync with the index. Its largest holdings include Nvidia, Apple, Microsoft, Amazon, and Alphabet, which comprise nearly 28% of the total ETF assets.
This concentration can be beneficial for growth, especially since these companies have seen impressive performance lately. Yet, there’s an inherent risk if anything were to affect one of these stocks. We tend to focus a lot on artificial intelligence (AI) currently, but trends can change quickly in the market.
If SpaceX or a similar tech company were added to the index and it remains a top company upon entry, its proportion in the index would automatically be significant. For investors disinterested in SpaceX, the Vanguard ETF might not be the right choice.
Market Dynamics
The Invesco ETF would still gain exposure to SpaceX stock if it enters the S&P 500, which could happen next year, but its impact would be limited since all stocks in the ETF would be equally weighted.
Weighted indexes lean towards growth stocks. As a company’s value increases, its weighting in the index grows. Historically, these stocks have outperformed their equally weighted counterparts. However, equal weight ETFs often show less volatility and can perform better during market corrections. For instance, during the downturn in 2022, the Invesco ETF experienced a 13% drop, whereas the Vanguard ETF saw a 20% decrease. This year, Invesco has also slightly outperformed Vanguard.
Given the current market emphasis on AI and with the overall outlook looking strong, the Invesco ETF might be the more attractive option for investors.
