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Investors poured record amounts of money into a fund that spreads its assets evenly across the S&P 500, as concerns grow that Wall Street returns have become too dependent on a handful of tech titans.
The Invesco S&P 500 Equal Weight exchange-traded fund earned about $14.4 billion in the second half of 2024, according to Morningstar data, as investors hedged against the dominance of large tech stocks.
The increase lifted the fund’s total inflows to $17 billion annually and comes after consecutive years in which the fund has underperformed the S&P. Analysts say this underscores how worried investors are becoming about the shadow cast by Magnificent Seven technology shares — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Last year, the S&P rose 24 percent, with seven accounting for about half of the index’s gains, according to S&P Dow Jones Indices. The equal-weight index rose just 11 percent as its quarterly rebalancing favored lower-growth stocks.
“The biggest focus for investors recently has been concentration risk, the concern that the market is overextended,” said Manish Kabra, head of U.S. equity strategy at Société Générale. He expects to see double-digit earnings growth outside of the biggest tech companies this year.
“If that happens, you don’t have to be so defensive,” he said, adding that “so many people I meet point out that the equally weighted index gained 11 percent last year and say it makes more sense to invest there than to expect more than 20 returns [from the market-cap weighted S&P 500] every year.”
The Invesco fund sells the leading S&P holdings and buys its laggards each quarter when it rebalances, to give each of its holdings an equal share of the fund’s assets. That approach was beneficial in 2022, as the index’s largest stocks bore the brunt of the selloff that year.
Despite the poor performance, the fund has amassed more than $72 billion, making it one of the 25 largest U.S. ETFs by total assets, according to Morningstar. That performance surpassed the ETF’s previous best for flows of about $12.8 billion in 2023, according to Morningstar.
Investors are also turning to derivatives, such as CME Group’s equal-weight S&P 500 futures, to bet on the S&P while hedging against sharp declines in tech stocks. The contract, which launched in February, had an average of 16,500 open contracts this month, worth about $2.4 billion.
A sharp decline in Magnificent Seven shares in July and August led to a spike in interest in the contract, CME’s global head of equity products Paul Woolman said. “I think it has awakened some more clients in terms of how to manage that risk and what strategies they should employ.”
“It’s a reflection of market participants looking to diversify into cheaper assets, not just looking for performance,” Alessio de Longis, chief investment officer at Invesco Solutions, the multi-asset arm of the $1.8 trillion fund manager, said of the general trend towards interest in equal weighting.
However, Bryan Armour, director of passive strategies research at Morningstar, said using a fund that is tailored to give equal weight to each company is unlikely to be the way to go to get around fears of market concentration.
“Incorporating fundamentals into each company’s valuation would serve investors better than arbitrarily giving them equal weight,” Armor said. “It would at least better reflect the identity of the market.”
T Rowe Price portfolio manager Rick de los Reyes said the shift in sentiment could help sectors such as energy, metals, mining and other industrial stocks. “There is some excitement about parts of the market that have been left behind and the view is that you might finally see some strength,” he said.
