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With all the vicious trading going on in the tech sector, you would think the S&P 500 would be at least halfway to correction territory. And while there have been rather small potholes in the road that the market has had to ride through, the picture becomes a bit clearer when you have a look at the 493 stocks that aren’t in the Magnificent Seven.
Undoubtedly, the names have been a real drag, with AI enthusiasm no longer doing it for many investors who would rather wait until after AI spend delivers the return. At this juncture, the Mag Seven look incredibly cheap. And they might actually be the new safety plays in this market, as market breadth improves beyond the mega-cap tech darlings.
The equal-weight S&P 500 might be the new S&P 500
For those seeking greater diversification or something less concentrated in just seven stocks, the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) may very well be the new “market” to bet on. The S&P 500’s market cap-weighting might finally be ready to haunt it.
Either way, an ETF such as the Invesco S&P 500 Equal Weight ETF stands out as the cure for extreme concentration at the top. And while the equal-weighted version of the S&P 500 might be outperforming, at least on a year-to-date basis, now up more than 5%, while the S&P 500 has delivered close to 0%, I certainly wouldn’t be surprised if the recent trend persists for a while longer.
While I’m not bearish on the Mag Seven, bottlenecks in AI might push out some of the magnificent gains further out. Maybe that’s a year before AI jolts the Mag Seven, or maybe it could take as long as five years before the excitement factor returns to levels where it was in the two years following the release of ChatGPT. Either way, pivoting back to good, old-fashioned research to advance AI will take a lot of time. But, then again, so too will the AI buildout, as critical components and power infrastructure remain in short supply.
The Mag Seven lose their luster
In any case, an equal-weighted version of the S&P 500 doesn’t axe out the Mag Seven. Instead, their exposures are simply brought back down to earth. The Invesco S&P 500 Equal Weight ETF has a 16% allocation to tech stocks, which, I think, is good enough, especially for new investors who no longer view the S&P 500 as diversified enough.
Given the S&P 500’s 34-35% weighting in technology and 11.2% in communication services, you’re pretty much getting a tech-weighted ETF, which might not be the most comforting place to be if you’re less enthusiastic about the state of the AI trade, or worse, you expect a bit of an AI bubble to correct itself. For years, the equal-weight S&P 500 has been a drag on returns, as the Mag Seven became the only thing worth betting on in the earlier innings of the AI revolution.
Things have changed, and ETFs like the Invesco S&P 500 Equal Weight ETF are now leading the way. For how long? I have absolutely no idea. If you like the newfound momentum, the lower price-to-earnings (P/E) multiple (22.4 vs. 27.5 times), and don’t mind paying a marginally higher (0.25%) expense ratio, I think going the route of equal-weight might be a smart move here.
Given that the smart money has been loading up on the Invesco S&P 500 Equal Weight ETF in the last quarter (at least a dozen hedge funds were buyers), I’d argue it’s a very smart move.