If you’ve held an S&P 500 index fund or exchange-traded fund (ETF) in your portfolio over the past decade, kudos to you! The formidable S&P index, which holds a diversified basket of large, well-known companies that offer a broad view of economic health, has an impressive annualized return of 11.5% over the last 10 years.
But many analysts now are warning that your S&P 500 fund may not do nearly as well in the coming years and it can pose considerable risks. For starters, it’s not that diversified anymore—the index weights companies by their market capitalization, so the larger and more valuable a company grows, the higher the percentage of the S&P 500 it occupies. Recently, the top 10 stocks accounted for more than 30% of the entire index—that’s the highest concentration in more than a half-century.
What’s more, the stratospheric rise of Internet and artificial intelligence (AI) stocks has turned the S&P 500 into a mega-cap technology fund. Last year, tech stocks accounted for about 60% of the index’s overall gains. That has led to inflated valuations and concern that the tech sector can’t keep growing at the same pace. If a handful of companies such as Apple, Nvidia or Microsoft ever stumble, the S&P 500 could suffer serious losses.
One solution: Consider some exposure to the dozens of ETFs that weight companies in the S&P 500 in unconventional ways to make the index more diversified, less volatile and more profitable depending upon the market environment. Examples: Some of these S&P 500 ETFs give the greatest allocations to the most undervalued stocks in the index…some emphasize smaller-cap stocks…and others give the same percentage weight to every stock in the index.
Bottom Line Personal asked ETF expert Bryan Armour, CFA, to explain how these unconventional S&P 500 funds work…the advantages and drawbacks of each…and how they might be useful for your portfolio now…
All the ETFs below are available through major brokerage firms…
Best-fit ETF: Invesco S&P 500 Equal Weight ETF (RSP). Expense ratio: 0.2%. Performance: 10.56%.*
How it works: Instead of assigning weightings to companies according to market capitalization, each stock in this ETF is represented in equal proportions—about 0.2% of the overall index—regardless of their size or sector. So the performance of the largest company in the S&P 500 (Apple) has as much influence on the index as the smallest (print media firm News Corp). The fund is rebalanced quarterly.
Why you need it: This ETF has a much greater emphasis on mid-cap and smaller large-cap stocks, as well as cheaper valuations overall. You also get more balanced exposure to materials, industrial and real estate rather than tech stocks. Frequent rebalancing allows the ETF to trim its winners instead of letting them grow larger and larger as a conventional S&P 500 fund does. This ETF has outperformed the conventional S&P 500 since its 2003 inception.
Top holdings: Walgreens, Boots Alliance Inc., Constellation Energy Corp., Broadcom Inc., though each holding will share an equal weight after each rebalance.
Drawbacks: This fund falls behind when large tech companies lead the market. Last year, it returned just 13% versus 23% for the conventional S&P 500. An equal-weighting strategy also creates higher turnover and trading costs than its market-cap weighted peers.
Best-fit ETF: S&P 500 Revenue Weighted Index (RWL). Expense ratio: 0.39% Performance: 11.8%.
How it works: The fund holds all the stocks in the S&P 500, but instead of weighting them by market cap, the heaviest allocations go to companies with the highest annual revenues. There is a maximum 5% allocation per stock, and the fund is rebalanced quarterly
Top holdings: Walmart, UnitedHealth Group, Berkshire Hathaway.
Why you need it: A revenue-weighted approach focuses on undervalued companies. The ETF’s overall price-to-earnings ratio (P/E) is 30% less than the conventional index. The fund also better reflects the health of the broader economy since it is directly tied to economic activity. Just 11% of the fund’s assets are in technology.
Drawbacks: The value stocks that this fund is heavily exposed to have trailed the S&P 500 index’s performance for the past decade and continue to be out of favor.
Best-fit ETF: Invesco S&P 500 Pure Value ETF (RPV). Expense ratio: 0.35%. Performance: 8.4%.
How it works: The fund selects and weights about 110 stocks from the S&P 500 that score highest on a screen for cheap valuations including metrics such as book-value-to-price ratio, P/E and sales-to-price ratio. The resulting portfolio, which is rebalanced annually, looks very different from the conventional index. It tilts toward midcap stocks and emphasizes very out-of-favor sectors. Example: Its largest allocation was recently to the health-care sector. Technology stocks accounted for only 2.5% of the fund.
Top holdings: Centene Corp, General Motors Co, CVS Health Corp.
Why you need it: This ETF appeals to contrarian investors looking for potential bargains in the S&P 500. Investor expectations for these holdings are so low that even small amounts of good news or improvements in fundamentals can lift the stock price. The fund really shines in bad markets. During the 2022 bear market, it lost just 1% versus an 18% drop for the conventional index.
Drawbacks: The fund’s long-term returns have greatly lagged the S&P 500 and exhibited higher volatility. Also, because this strategy doesn’t focus on a company’s quality characteristics such as financial stability, experienced management or earnings growth, it can result in owning “value traps”—businesses that are attractively priced because they have little growth potential
Best-fit ETF: Invesco S&P 500 Quality ETF (SPHQ). Expense ratio: 0.15%. Performance: 13.36%.
How it works: The ETF holds the top 100 stocks in the S&P 500 that rank highest in “quality,” according to metrics like return on equity and debt-to-book value. This effectively weeds out companies that rely heavily on debt financing or are aggressively growing their assets. Instead, you wind up with a portfolio of “steady compounders,” industry leaders with proven track records of stable earnings growth in good and bad times. The portfolio is rebalanced twice a year. To reduce volatility, each stock’s maximum position is capped at 5% of the portfolio, and no sector can account for more than 40% of the portfolio.
Top holdings: Visa, Johnson & Johnson, MasterCard.
Why you need it: You can consider this fund of blue-chip stocks as a core holding to replace a conventional S&P 500 fund. Its long-term performance is the same, but it plays superior defense in rocky markets and economic slowdowns, losing relatively less than the conventional fund.
Drawbacks: The ETF will trail the S&P 500 in environments when chasing more speculative growth is in fashion. Also, the fund’s annual turnover is high, so it is best held in a tax-deferred account.
Best-fit ETF: Invesco S&P 500 Momentum ETF (SPMO). Expense ratio: 0.13%. Performance: 19.2%.
How it works: Multiple academic studies show that stocks whose prices have risen the most over the past two-to-12-month period are likely to keep going up. This fund capitalizes on that phenomenon by rating each stock in the S&P 500 index according to its price momentum over the previous year. The ETF adjusts for volatility to produce picks that have experienced a relatively smooth increase in price. The result is a portfolio of the top 20% of companies in the S&P 500, weighted by their momentum score and market capitalization and rebalanced twice a year.
Top holdings: Amazon.com, NVIDIA, Broadcom.
Why you need it: The momentum growth strategy can do relatively well in both up and down markets as long as stock market leadership is stable for extended periods. If you’re bullish on the economic recovery and AI-driven tech stocks now, this is a great ETF to own.
Drawbacks: The fund can be even more top heavy than the traditional S&P 500. It recently had 60% of its allocation in its top 10 holdings and nearly half the portfolio in just two sectors—technology and financial services. The momentum strategy struggles when the stock market is choppy and investors jump from sector to sector with no clear trends.
Best-fit ETF: ProShares Ultra S&P 500 ETF (SSO). Expense ratio: 0.89%. Performance: 20.6%.
How it works: The fund is identical to a conventional S&P 500 index fund—except that it uses derivatives to produce twice the daily return, both positive and negative, of the index.
Top holdings: Apple, Nvidia, Microsoft.
Why you need it: The ETF gained an eye-popping 42% last year, but it’s useful only for investors who want to make short-term, high-risk bets on the direction of the S&P 500. That strategy worked well in the 2023–2024 bull market because the index kept hitting record highs with minimal volatility.
Drawbacks: The fund has a potential for painful losses that make it unattractive for long-term buy-and-hold investors. It has plummeted as much as 68% in a single year. In addition, a high expense ratio and trading costs can eat into your profits. The leveraged strategy also subjects you to much higher risk than is apparent. Remember—if a fund loses 10% in a day, it takes more than a 10% gain the next day to get back to even. Investments that swing widely in price like this ETF result in lower compounded returns over time.
*All performance figures are ten-year annualized and are from Morningstar, Inc. as of Friday, January 17, 2025. For current pricing, go to Morningstar.com. Bottom Line Personal recommendations are meant for five- and 10-year horizons—not for immediate profits.
