Beyond Traditional S&P 500 Indexes: An Equal-Weight Alternative Worth Considering

The Concentration Problem in Standard Index Funds

Most widely-recommended index funds—such as the Vanguard S&P 500 ETF (NYSEMKT: VOO)—track the S&P 500 using market-cap-weighting methodology. While this approach has merits, it creates a significant structural issue.

The numbers tell a compelling story. Over the past 15 years, the S&P 500 index has beaten approximately 88% of actively managed large-cap funds, and over the past decade it’s outperformed 86% of them. Warren Buffett and other respected investors have championed such index funds for good reason. The index maintains relevance by regularly pruning underperformers and adding emerging growth companies.

However, market-cap-weighted construction means that larger corporations dominate the index’s movement. Currently, just five mega-cap stocks—Nvidia, Microsoft, Apple, Amazon.com, and Meta Platforms—represent nearly 28% of the fund despite constituting only 1% of the 500 components. This extreme concentration creates vulnerability; when these giants stumble, the entire index suffers disproportionately.

The Equal-Weight Solution

There’s an alternative approach to S&P 500 exposure that deserves consideration: the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). This fund structures its holdings differently by allocating roughly equal weight to each of its approximately 500 components.

The practical difference is substantial. Rather than a handful of positions dominating performance, the top holdings in an equal-weight construct would represent only 1-2% of the fund’s value. This structural design creates an advantage when smaller-cap constituents outperform their mega-cap counterparts—a scenario that has historically occurred with regularity.

Why This Structure Matters for Long-Term Investors

An equal-weight approach distributes risk more evenly across holdings, potentially reducing the impact of any single company’s decline. When examining S&P 500 composition across different market cycles, smaller constituents have periodically driven broader index appreciation, particularly during periods when mega-cap dominance has become extreme.

For investors seeking S&P 500 exposure with lower concentration risk, the Invesco S&P 500 Equal Weight ETF offers a credible alternative that may deliver competitive returns over coming years with improved risk-adjusted characteristics. The structure removes the inherent vulnerability to mega-cap downturns that plague traditional market-cap-weighted constructs.

Consider evaluating whether this approach aligns with your long-term investment objectives and risk tolerance before making allocation decisions.