(P1) A first-quarter flight from tech concentration sent $10 billion in net inflows to the Invesco S&P 500 Equal Weight ETF (RSP), as investors pivot to strategies that reduce exposure to a handful of mega-cap names. The move highlights a growing trend toward smart-beta funds to diversify portfolios.
(P2) "You’ve got this kind of sweet spot where you’ve got more attractive valuations, and you’ve got a return to earnings growth, and it’s a really nice setup,” said Tim Thomas, chief investment officer of Badgley Phelps Wealth Managers. “That should continue to serve the equal-weight strategy.”
(P3) The diversification is paying off in early returns. The equal-weight RSP is up 4.2% year-to-date, while the market-cap-weighted Vanguard S&P 500 ETF (VOO) is flat over the same period. This trend is also visible in other non-capitalization-weighted funds, including the First Trust Dow 30 Equal Weight (EDOW) and Direxion Nasdaq-100 Equal Weighted Index (QQQE).
(P4) The shift suggests investors are acting on long-standing advice to diversify away from indexes where the top 10 holdings, dominated by tech, can comprise nearly 40% of the total assets. With earnings growth expected to broaden, these alternative weighting strategies offer a way to capture upside in the other 493 S&P 500 companies.
The move into equal-weight funds is part of a broader investor appetite for "smart beta" strategies, which are rules-based approaches that deviate from traditional market-cap weighting. Invesco’s own S&P 500 Revenue ETF, which weights firms by revenue, saw net inflows of $813 million in the first quarter.
These strategies provide continued exposure to the technology sector but often with an emphasis on smaller companies, while also increasing allocations to underrepresented sectors like real estate and utilities, according to Todd Rosenbluth, head of research at TMX VettaFi. Other popular methods include fundamental weighting, based on economic scale, and funds focused on high dividend yields or free cash flow.
The renewed interest in diversification comes amid a backdrop of market uncertainty, including inflation and geopolitical concerns. "I think folks are catching on that it is time to go back to diversification and basic principles of investing,” said John Davi, founder of Astoria Portfolio Advisors.
For investors looking to maintain a traditional market-cap structure, Davi suggests adding sector-specific funds that stand to benefit from the current economic environment. He points to ETFs focused on utilities, which could gain from data-center growth, and banks, which may see a lift from deregulation and potential IPOs.
This article is for informational purposes only and does not constitute investment advice.
