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According to Business Insider and public filings, the S&P 500 has averaged a 10.5% return since 1957, which explains its popularity with investors. Even by that standard, it has been on a hot streak. It delivered a 24.2% return in 2023 and tech stocks powered many of those gains. Although it appears the bull run will continue, a sector-wide downturn is always possible. If that makes you skittish about the S&P 500, consider this ETF outperforming it.
Life is full of paradoxes, one of which is that every strength can also be a potential weakness. Think of a pitcher with a great fastball but a limited selection of secondary pitches. If he's blowing the fastball by his opponent, everything is fine. However, major league hitters adjust and eventually, they will catch up to any fastball if a pitcher is over-reliant on it.
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For a similar reason, some investors and analysts are concerned about the S&P 500. it relies heavily on tech to deliver its admittedly impressive returns. Investor Philip Van Doorn discussed this vulnerability in an article for MarketWatch. He noted that the S&P 500 is a cap-weighted index, meaning its value and performance depend heavily on the performance of the large-cap stocks in the portfolio. Currently, tech stocks are carrying a lot of that weight.
That's all good if the stocks carrying the weight are gaining, but it has some potential drawbacks. The weighting could lead to S&P 500 investors being less diversified than they realize. An index fund with a more even or completely neutral portfolio in terms of weight will deliver lower gains during boom times and lower potential losses during downturns.
One such evenly weighted fund is the Invesco S&P 500 Equal Weighted Index ETF. It holds a highly diversified, evenly weighted portfolio of S&P 500 stocks in several sectors. The final result for investors is a fund with similar exposure to different sectors and companies in the asset portfolio as it does to Big Tech shares. This fund also rebalances itself every quarter to maintain an ideal equilibrium.
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While the weight distribution is certainly important, performance is always what matters most when investing. Since its inception, Invesco's data shows that its S&P 500 Equal Weighted Index Fund has delivered an average return of 11.71%, which bests the S&P 500 at 11.13%. That's over half a point, which can result in a sizable difference in return over an investment’s life.
This doesn't mean the S&P 500 won't outperform Invesco's index for some years or over an extended period. Performance is never guaranteed. It does, however, mean there may be a way for you to achieve returns like the S&P 500 without inadvertently having too many eggs in any sector's basket. That hedge could be a great safety net in a sharp, unexpected tech-sector downturn.
Diversification has always been a critical pillar of successful wealth-building and investment strategies. Indexes like the S&P 500 were established to help investors accomplish that end. Sometimes, a look at the fine print of index portfolios reveals an overexposure to one sector, which may defeat the purpose of investing in the index. If that's your concern, evenly weighted ETFs might be worth considering.
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This article If You Think The S&P 500 Is Overloaded On Tech, You Might Like This ETF That's Outperforming It! originally appeared on Benzinga.com