Why invest in an equal-weight S&P 500 ETF?

The S&P 500 (^GSPC +1.18%) is a powerhouse index, with decades of history surviving even the worst bear markets, crashes, and recessions.

It’s also a market-cap-weighted index, meaning larger stocks are weighted more heavily within the portfolio. That isn’t necessarily a bad thing, as large companies often add more stability to the index.

But for most of the past 25 years, the S&P 500 has been outperformed by its equal-weighted counterpart: the Invesco S&P 500 Equal Weight ETF (RSP +1.30%). Here’s why history says this ETF could be poised for more growth in the years ahead.

Why invest in an equal-weight S&P 500 ETF?

The Invesco S&P 500 Equal Weight ETF includes all of the stocks from the S&P 500. However, rather than ranking them by market cap, all holdings make up roughly the same percentage of the portfolio.

For example, Nvidia is the largest company in the S&P 500, accounting for nearly 8% of the index by market cap. But that stock accounts for only around 0.2% of the Equal Weight ETF’s portfolio, similar to every other company in the fund.

Historically, the Equal Weight ETF has proved to be more lucrative, outperforming the S&P 500 by a fairly wide margin for most of the past two decades.

RSP Total Return Level data by YCharts

The index only began closing the gap over the last couple of years, as mega-cap tech companies have skyrocketed in value. When supercharged stocks like Nvidia make up a larger share of the S&P 500, they lift the entire index with their explosive growth.

Why this ETF is positioned for growth

The other side of that coin, though, is that a relatively small number of companies can also drag the entire index down.

The “Magnificent Seven” — comprising Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla — together account for around one-third of the S&P 500’s total value. These stocks have been hit hard in recent weeks, as investors grow cautious around AI spending.

The Roundhill Magnificent Seven ETF, which holds only these seven stocks, has plunged by more than 13% in the past month. Excluding those seven stocks, though, the rest of the S&P 500 has surged by more than 2.5% over that period. But because the S&P 500 is so heavily weighted toward megacap tech, the overall index has still dipped.

MAGS Total Return Level data by YCharts.

The Invesco S&P 500 Equal Weight ETF was designed for periods like this, particularly for investors unsettled by big tech’s influence on the S&P 500. While historical performance can’t predict future returns, this ETF could outpace the S&P 500 by an even wider margin if tech stocks continue their slump.

The S&P 500’s heavy concentration in tech stocks can leader to larger swings — for better or worse. For investors looking for more balanced exposure to the S&P 500 index, the Invesco S&P 500 Equal Weight ETF could be a safer (and perhaps more lucrative) choice.