The Stock Market May Have a Serious Problem — 2 Brilliant Index Funds to Buy to Hedge Against the Risk

The U.S. stock market is in a precarious position due to elevated valuations and sweeping tariffs that threaten to slow economic growth. But many investors are overlooking another serious problem: concentration risk.

The top 10 stocks in the S&P 500 (SNPINDEX: ^GSPC) account for nearly 40% of its market capitalization. The index has never been more concentrated at any point in history, which means poor performances from a few companies could have a profoundly negative impact on the entire S&P 500.

“If the historical pattern persists, high concentration today portends much lower S&P 500 returns over the next decade than would have been the case in a less concentrated market,” writes David Kostin, chief U.S. equity strategist at Goldman Sachs.

Investors can hedge against that risk with two equal-weight S&P 500 index funds: The Invesco S&P 500 Revenue ETF (RWL 0.85%) and the Invesco S&P 500 Equal Weight Technology ETF (RSPT 0.64%). Read on to learn more.

1. Invesco S&P 500 Revenue ETF

The Invesco S&P 500 Revenue ETF tracks all 500 companies in the S&P 500, but it weights them based on trailing-12-month revenues rather than market value. The index fund also imposes a 5% weight cap, which means no stock can exceed 5% of its total market value.

The top 10 positions in the Invesco S&P 500 Revenue ETF are listed by weight below:

1. Walmart: 3.8%
2. Amazon: 3.5%
3. Apple: 2.4%
4. UnitedHealth Group: 2.3%
5. McKesson: 2.2%
6. CVS Health: 2.1%
7. Berkshire Hathaway: 2%
8. ExxonMobil: 1.8%
9. Cencora: 1.7%
10. JPMorgan Chase: 1.5%

The benefit of the Invesco S&P 500 Revenue ETF is it avoids the concentration risk inherent to market-cap weighted alternatives, which tends to make it more resilient. For instance, the Invesco ETF declined 18% during the bear market of 2022, while the S&P 500 fell 25%. Similarly, the Invesco ETF declined 15% earlier this year when President Trump announced tariffs, while the S&P 500 fell 19%.

However, eliminating the concentration risk inherent to market-cap weighted funds is not always a good thing. It hurts when the most heavily weighted stocks perform well, which is exactly what happened over the last decade. The Invesco S&P 500 Revenue ETF returned 245% in the last 10 years, underperforming the 310% gain in the traditional S&P 500.

Additionally, the Invesco S&P 500 Revenue ETF has a relatively high expense ratio of 0.39%, which means shareholders will pay $39 annually on every $10,000 invested in the fund. That is above the average expense ratio of 0.34% on U.S. exchange-traded funds. Even so, the Invesco ETF is a good option for investors who want exposure to the S&P 500 without the concentration risk.

2. Invesco S&P 500 Equal Weight Technology ETF

The Invesco S&P 500 Equal Weight Technology ETF includes all 68 companies in the S&P 500 information technology sector, but each constituent has the same weight regardless of market capitalization. That means no stock influences the performance of the index fund more than any other stock.

The benefit of the Invesco S&P 500 Equal Weight Technology ETF is it avoids concentration risk inherent to market-cap weighted funds, while still providing exposure to the technology sector, which was the best-performing stock market sector during the last 10 years. In fact, it more than tripled the returns in the next-closest sector during that period.

Consequently, the Invesco ETF achieved a total return of 468% over the previous decade, crushing the 310% return in the S&P 500. Similar outperformance is plausible in the next decade because artificial intelligence should be a major tailwind for technology stocks. Hedge fund manager Philippe Laffont thinks the technology sector will account for 75% of the entire U.S. market cap by 2030, up from less than 40% today.

The last thing prospective investors should know is the fee structure. The Invesco ETF has a relatively high expense ratio of 0.4%, meaning shareholders will pay $40 per year on every $10,000 invested in the fund. Nevertheless, the Invesco ETF is a good option for investors who want exposure to technology stocks without the concentration risk that comes with market-cap weighted products.