You're probably looking at your portfolio right now and seeing a lot of Nvidia. Maybe a massive chunk of Microsoft. That’s because the standard S&P 500 is a "market-cap weighted" index. It’s basically a popularity contest where the biggest companies get the most lunch money. But here’s the thing: when seven companies—the so-called Magnificent Seven—drive almost all the gains, you aren't really diversified. You're just betting on Silicon Valley. That’s exactly why the S&P 500 equal weight ETF is suddenly the hottest conversation in the rooms where people actually manage serious capital.
It’s simple.
Instead of giving Apple 7% of your money and a random utility company 0.1%, an equal-weight fund gives everyone the same slice of the pie. In the S&P 500, that’s roughly 0.2% per company.
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Why the S&P 500 Equal Weight ETF isn't just a boring alternative
Most people think the S&P 500 is the ultimate "safe" bet. And historically, it’s been incredible. But we are living through a weirdly top-heavy era. According to S&P Dow Jones Indices, the concentration in the top 10 stocks of the S&P 500 reached levels recently that we haven't seen since the 1970s. It’s a bit scary if you think about it. If one of those tech giants has a bad earnings call or a regulatory nightmare, the whole index sinks.
The S&P 500 equal weight ETF—the most famous one being the Invesco S&P 500 Equal Weight ETF (RSP)—changes the math.
Think about the "size factor."
In quantitative finance, there’s this idea that smaller companies (even "small" companies in the S&P 500 are still huge) tend to have more room to run than the trillion-dollar behemoths. When you buy RSP, you are essentially "selling" the expensive winners and "buying" the undervalued laggards every time the fund rebalances. It’s a built-in "buy low, sell high" mechanism. You don't have to do anything. The fund does the rebalancing quarterly.
Honestly, it’s a relief for people who are worried about a tech bubble. If the AI hype cools off, the market-cap weighted S&P 500 (like SPY or VOO) is going to take a massive hit. The equal-weight version? It’ll likely hold up much better because it’s leaning on the other 493 stocks that have been ignored for the last eighteen months.
The brutal reality of performance gaps
Let’s look at the numbers because they don't lie. In 2023, the standard S&P 500 crushed the equal-weight version. It wasn't even close. The Magnificent Seven went to the moon, and the market-cap index followed.
But look at the early 2000s.
After the dot-com bubble burst, the S&P 500 equal weight ETF strategy (if you could trade it easily back then) would have saved your life. From 2003 to 2006, the equal-weight index outperformed the cap-weighted version by significant margins. Why? Because the "rest of the market" was finally catching up while the previous tech darlings were licking their wounds.
We see this cycle over and over.
There's a term for this: Mean Reversion.
Stocks don't go up in a straight line forever. Eventually, the valuation of a company like Nvidia becomes so stretched that it has to breathe. When that happens, money tends to rotate into "value" sectors—think industrials, materials, and mid-sized healthcare firms. These are the companies that have a much higher weighting in an equal-weight fund than they do in your standard Vanguard or BlackRock S&P 500 fund.
What happens under the hood?
When you buy a ticker like RSP, you're getting exposure to 500 companies, but the sector breakdown looks wildly different.
In a standard S&P 500 fund, Information Technology usually makes up nearly 30% of the entire portfolio. That is a massive concentration. In an S&P 500 equal weight ETF, Tech drops down to about 13-15%. Meanwhile, sectors like Industrials and Financials get a massive boost.
It’s a more "democratic" way to invest.
You’re betting on the American economy as a whole, not just the part of the economy that builds chips or runs social media platforms.
Does the higher expense ratio matter?
This is where the skeptics jump in. RSP has an expense ratio of around 0.20%. Compare that to VOO or IVV, which are sitting at roughly 0.03%.
Yes, it's more expensive.
Is it "too" expensive? Probably not.
The reason it costs more is that the fund manager has to trade more often. Every quarter, they have to sell the stocks that went up (to bring them back down to 0.2%) and buy the stocks that went down. That creates transaction costs. But for most investors, a 17-basis-point difference is a small price to pay for the peace of mind that comes with true diversification.
The "Sector Tilt" Trap
You have to be careful, though. Equal weighting isn't a magic wand.
Because you're giving more weight to the smaller companies in the index, you're technically moving down the "quality" or "stability" ladder just a tiny bit. A company ranked #490 in the S&P 500 is still a massive, profitable enterprise, but it might not have the "fortress balance sheet" of an Apple or a Google.
During a massive market crash—like 2008 or the COVID-19 panic—equal-weight funds can sometimes drop harder and faster.
Why? Liquidity.
When people panic, they sell everything. The smaller stocks in the index often have less liquidity than the giants, meaning their prices can swing more violently. You have to be able to stomach that volatility if you want the long-term rewards.
Real-world example: The 2024 rotation
Earlier in 2024, we saw a glimpse of this. For a few weeks in July, the "Magnificent Seven" started to pull back. Investors got nervous about AI ROI. Suddenly, the S&P 500 equal weight ETF started ripping higher while the Nasdaq and the standard S&P 500 were flat or down.
This was the "Great Rotation."
Money left the over-concentrated winners and flowed into the "Laggard 493." If you only held a market-cap weighted fund, you didn't feel the benefit of that rotation. You just felt the pain of the tech sell-off. But if you had a slice of your portfolio in an equal-weight fund, those gains in banks and energy companies acted as a hedge.
It’s about not having all your eggs in one very shiny, very expensive basket.
How to actually use this in your portfolio
You don't have to go "all in" on equal weight. That’s a mistake people make—thinking in binaries.
Most sophisticated investors use a "Core and Satellite" approach.
- The Core: Maybe 70% of your US large-cap exposure stays in a low-cost S&P 500 fund (like VOO). You want those big winners. They are big for a reason.
- The Satellite: Put 30% into an S&P 500 equal weight ETF.
This mix gives you the best of both worlds. You participate in the upside when Big Tech is screaming higher, but you have a "safety valve" that captures the growth of the rest of the market. It also reduces your "maximum drawdown" risk if a specific sector—like Tech or Consumer Discretionary—takes a decade-long dirt nap.
Who is this NOT for?
If you are a 22-year-old with a 40-year time horizon and zero fear of volatility, you might just want to stick to the standard index or even the Nasdaq 100. Over very long periods, market-cap weighting is incredibly efficient. It lets your winners run. It’s the ultimate "momentum" strategy.
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But if you are 50 years old?
If you are five or ten years from retirement?
The concentration risk in the standard S&P 500 is a genuine threat to your lifestyle. If the market-cap index pulls a "Lost Decade" like it did from 2000 to 2010 (where the S&P 500 return was basically zero), you could be in trouble. Interestingly, during that same "lost decade," an equal-weight approach actually produced positive returns.
Actionable Steps for Investors
If you're ready to look beyond the top-heavy standard index, here is how to handle the transition to an S&P 500 equal weight ETF without messing up your tax bill or your strategy.
1. Check your "Overlap"
Before buying RSP or any other equal-weight fund, use a tool like Morningstar’s "Instant X-Ray." See how much of your wealth is actually tied up in just five stocks. If it’s more than 25%, you are dangerously concentrated.
2. Watch the Tax Man
If you hold your S&P 500 funds in a taxable brokerage account, selling them to buy an equal-weight fund will trigger capital gains taxes. Don't do that unless you have to. Instead, direct your new contributions (your monthly savings) into the equal-weight ETF until you reach your desired balance.
3. Rebalance with Purpose
The whole point of the S&P 500 equal weight ETF is its internal rebalancing. You don't need to trade it. Just let the fund do the work of selling high and buying low for you.
4. Don't Panic during Tech Rallies
There will be years where Apple and Nvidia go up 100% and your equal-weight fund only goes up 15%. You will feel like you’re missing out. FOMO is the enemy of the equal-weight investor. Remember that you aren't trying to beat the tech giants every single year; you're trying to survive the year they eventually fall.
The S&P 500 equal weight ETF is essentially an insurance policy against the hubris of the market. It assumes that nobody knows which stock will be the biggest in ten years, so it treats every company with the same level of respect. In an era of record-breaking concentration, that might be the smartest move you can make.