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Investors have poured record amounts of money into a fund that spreads its assets equally across the S&P 500, as concerns mount that Wall Street’s returns have become overly reliant on a handful of technology titans.
The Invesco S&P 500 Equal Weight exchange traded fund took in about $14.4bn in the second half of 2024, according to data from Morningstar, as investors hedged themselves against the dominance of big technology stocks.
The surge took total inflows for the fund to $17bn for the year and comes after consecutive years of the fund underperforming the S&P. Analysts said it underscores how investors are becoming concerned by the shadow cast by Magnificent Seven tech stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Last year the S&P rose 24 per cent, with the seven responsible for about half of the index’s gains, according to S&P Dow Jones Indices. The equal weight index rose just 11 per cent as its quarterly rebalance favoured lower growth stocks.
“Investors’ biggest focus recently has been concentration risk, worries that the market is too top-heavy,” said Manish Kabra, head of US equity strategy at Société Générale. He expects to see double-digit earnings growth beyond the biggest tech companies this year.
“If that happens, you don’t need to be so defensively positioned,” he said, adding that “so many people I meet point to the equal-weighted index gaining 11 per cent last year and say it makes more sense to invest there than to expect 20-plus returns [from the market-cap weighted S&P 500] every year.”
The Invesco fund sells the S&P’s leaders and buys its laggards every quarter when it rebalances, to give each of its holdings an equal share of fund assets. That approach was beneficial in 2022, as the index’s largest stocks bore the brunt of the sell-off that year.
In spite of its underperformance, the fund has amassed more than $72bn and made it one of the 25 largest US ETFs by total assets, according to Morningstar. That showing topped the ETF’s previous best for flows of about $12.8bn in 2023, according to Morningstar.
Investors are also turning to derivatives, such as CME Group’s S&P 500-equal weight futures, to bet on the S&P while hedging against a sharp drop in tech stocks. The contract, which launched in February, has averaged open interest of 16,500 contracts this month, worth about $2.4bn.
A sharp drop in the shares of the Magnificent Seven in July and August led to a jump in interest in the contract, said CME global head of equity products Paul Woolman. “I think that woke some more clients up in terms of how to manage that risk and what kind of strategies they should put in place.”
“It is a reflection of market participants wanting to diversify into cheaper assets and not just chasing performance,” said Alessio de Longis, head of investments with Invesco Solutions, a multi-asset arm of the $1.8tn fund manager, of the overall trend towards interest in equal-weighting.
However, Bryan Armour, director of passive strategies research at Morningstar, said that using a fund that adjusted to give each company an equal weighting was unlikely to be the best way to sidestep fears of market concentration.
“Incorporating fundamentals in the assessment of each company would better serve investors than arbitrarily making them all equal weights,” Armour said. “At least, that would better reflect the market’s identity.”
T Rowe Price portfolio manager Rick de los Reyes said the shift in sentiment could help sectors like energy, metals, mining and other industrial stocks. “There’s some excitement around the parts of the market that have been left behind, and the view that you could finally start to see some strength,” he said.
