The current landscape of the S&P 500 is marked by an unprecedented level of concentration, with the ten largest companies in the index representing approximately 40% of its total weight. This figure significantly exceeds the long-term average of around 20%, raising concerns among analysts who fear that such concentration could adversely impact investor returns over the coming decade. Historically, patterns suggest that high concentration often correlates with lower returns, according to David Kostin, chief U.S. equity strategist at Goldman Sachs.
In light of these developments, investors looking for alternatives may consider two specific index funds designed to mitigate concentration risks: the Invesco S&P 500 Revenue ETF and the Invesco S&P 500 Equal Weight ETF.
The Invesco S&P 500 Revenue ETF is structured to track the S&P 500 but weights its constituent stocks based on their trailing twelve-month revenues rather than market capitalization. This fund enforces a 5% cap on individual stock weights, ensuring that no single stock can dominate the index. Currently, the five largest holdings by weight in this fund include Amazon and Walmart, each at 3.8%, followed by UnitedHealth Group at 2.3%, CVS Health at 2.1%, and Alphabet also at 2.1%.
One of the primary advantages of the Revenue ETF is its ability to circumvent the concentration risks inherent in traditional market-cap weighted funds. For instance, during a turbulent market period when tariffs were announced, this fund’s value declined by 15%, in contrast to the S&P 500’s 19% drop. However, the Revenue ETF has historically underperformed compared to the S&P 500, returning 545% since its inception in 2008 compared to the S&P 500’s 630% during the same period. Investors are also cognizant of the ETF’s expense ratio of 0.39%, which translates into a cost of $39 for every $10,000 invested.
On the other hand, the Invesco S&P 500 Equal Weight ETF approaches the S&P 500 with a different strategy, assigning equal weight to all constituent stocks, removing concentration risks entirely. This method, however, comes with its own challenges; the fund has underperformed the S&P 500 by over 100 percentage points in the last decade. This underperformance can largely be attributed to the exceptional growth of a few large stocks, often referred to as the “Magnificent Seven.” As long as these stocks continue generating substantial returns driven by earnings growth, the Equal Weight ETF may struggle to keep pace.
Cost-wise, the Equal Weight ETF has a more moderate expense ratio of 0.20%, leading to an annual cost of $20 for every $10,000 invested, making it less expensive than the industry average of 0.34% but still pricier than conventional S&P 500 index funds.
Both the Invesco S&P 500 Revenue ETF and the Equal Weight ETF provide viable options for investors wary of concentration risk, each with its own set of risks and potential rewards. However, those considering these alternatives should keep in mind that while they offer unique advantages, they may not fully replicate the returns offered by the S&P 500 in an environment favoring large-cap stock performance.
