Investors Flock to Modified S&P 500 Strategy as Concentration Risk Looms

Investors are increasingly directing their funds towards a modified strategy for the S&P 500 index as the benchmark becomes less diversified due to the dominance of large technology companies. While traditional index funds have long been favored for their low expenses and reliable long-term performance, the growing concentration risk within the S&P 500 has prompted investors to seek alternative approaches.

Since its establishment in 1993, the SPDR S&P 500 ETF Trust (SPY) has experienced remarkable growth in its assets under management, which now stand at an impressive $412.5 billion. However, data provided by FactSet reveals that the five leading investments in SPY, namely Apple, Microsoft,, Nvidia, and Alphabet, make up a significant 24% of its overall portfolio. Additionally, the top 10 holdings constitute 31.6% of the portfolio, indicating a higher level of concentration compared to the tech bubble of 1999-2000 or the average concentration observed over the past 35 years, as stated by Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management.

Amid concerns about this narrow leadership and the increasing dominance of a few companies, investors have started flocking to the Invesco S&P 500 Equal Weight ETF (RSP). Over the past five weeks, $4.8 billion in new investments flowed into RSP, accounting for 14.9% of its assets under management as of May 19. This ETF follows an equal-weighted approach, providing a more balanced exposure across all companies in the S&P 500. While the equal-weighted strategy has historically shown greater volatility, it has outperformed the cap-weighted approach over three years, particularly during periods of concentrated market rallies.

As investors seek to mitigate concentration risk and take advantage of more balanced exposure, the modified S&P 500 strategy provided by the Invesco S&P 500 Equal Weight ETF has gained traction. Its periodic rebalancing to equal weights helps capture gains and minimize losses in a narrow market rally. By diversifying holdings away from the dominant technology sector, this ETF has demonstrated resilience and has been favored by investors as a core anchor investment while other funds focus on growth.