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