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Wall Street’s returns have become overly dependent on a few tech titans, prompting investors to pour large sums of money into funds that evenly spread their assets across the S&P 500.
The Invesco S&P 500 Equal Weight exchange-traded fund lost about $14.4 billion in the second half of 2024, according to Morningstar data, as investors braced themselves against a dominance of big tech stocks.
The increase took the fund’s total revenue to $17 billion for the year and comes after consecutive years when the fund underperformed the S&P. Magnificent Seven technology investors are concerned about how analysts said Shares – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
The S&P rose 24 percent last year, with the seven accounting for nearly half of the index’s gains, according to S&P Dow Jones Indices. The equal-weighted index rose just 11 percent as the quarter’s rebalancing favored lower-growth stocks.
Manish Kabra, head of U.S. equity strategy at Societe Generale, said: “The biggest concern for investors lately is the risk of concentration, the fear that the market is too heavy.” This year, he expects to see double-digit revenue growth above the big tech companies.
“There’s no need to get too defensive if that’s the case,” he said. “Many people I meet say the equal-weighted index gained 11 percent last year and it makes more sense to invest there than to expect 20-plus returns every year (than the market-weighted S&P 500).” .
The Invesco fund sells the S&P leaders and buys the laggards quarterly as it increases its balance, to give an equal share of each fund’s assets. That approach was useful in 2022, as the index’s largest stocks bore the brunt of the selloff that year.
Despite its underperformance, the fund has accumulated more than $72 billion, making it one of the top 25 U.S. ETFs in total assets, according to Morningstar. That performance was the ETF’s previous best, with inflows of nearly $12.8 billion in 2023, according to Morningstar.
Investors have turned to derivatives, such as CME Group’s S&P 500-equal-weight futures, to bet on the S&P, fending off a sharp fall in tech stocks. The contract, which started in February, has average open interest of 16,500 contracts this month, amounting to about $2.4 billion.
A sharp decline in the shares of the Magnificent Seven in July and August led to increased interest in the contract, said Paul Wollman, head of global equity products at CME. I think it has awakened some clients in terms of how they can manage that risk and what strategies they need to implement.
“This is a reflection of market participants looking to share assets cheaply and track performance,” said Alessio de Longos, chief investment officer with Invesco Solutions, the multi-asset arm of the $1.8 trillion fund manager. Interest in equal-weight.
However, Brian Armour, director of passive strategies research at Morningstar, said using a fund adjusted to give equal weight to each company may not be the best way to sidestep fears of market concentration.
“Incorporating fundamentals into each company’s valuation serves investors better than arbitrarily weighting them all equally,” Armor said. “At least that better reflect the identity of the market.”
Rick de los Reyes, portfolio manager at T Rowe Price, said a shift in thinking could help sectors such as energy, metals, mining and other industrial stocks. “There’s some excitement around the later parts of the market and there’s a perception that you’re finally going to start seeing some strength,” he said.
