By Paul R. La Monica
It's possible to have too much of a good thing, and most investors likely have too much tech in their portfolios. A revenue-weighted index could help solve that problem.
By this point, everyone knows that the Magnificent Seven has become a huge part of the S&P 500. Add Broadcom, and the stocks now make up more than 40% of the index, which is near a record high. But getting away from that isn't easy -- and for the past few years would have been a mistake.
Still, this might be the year to try something a little different -- and investors have many options. State Street, First Trust, and other investment firms offer equal-weighted exchange-traded funds that limit the size of individual stocks in various index and sector funds. There are so-called factor ETFs, which rank stocks by traits like momentum and quality. The RACWI US ETF (ticker: RAUS), which launched in September, looks at metrics such as sales, cash flow, buybacks, and dividends to rank stocks. All offer potential solutions to the S&P 500's diversification problem.
Traditional cap-weighted funds "unintentionally enshrine 'buy high, sell low' behavior, which may encourage investors to buy stocks when they are frothy and beloved and drop them when they are out of favor and cheap," Rob Arnott, founder and chairman of Research Affiliates, said in announcing the RACWI ETF's launch.
Revenue weighting offers a simple potential solution. The Invesco S&P 500 Revenue ETF $(RWL)$, which ranks the market's largest companies by sales, is a way for investors to diversify beyond the Magnificent Seven but still have megacap exposure. Weightings, capped at 5%, are determined by total sales.
So while Amazon.com and Apple are the ETF's second- and third-largest holdings, they make up only 6.2% of the fund's total assets, compared with just under 11% of the SPDR S&P 500 ETF $(SPY)$. What's more, they are the only two of the Magnificent Seven stocks that are among the 10 largest holdings in the fund. ( Microsoft and Alphabet are among the 20 largest holdings.) Walmart is the biggest position, while CVS Health, Berkshire Hathaway, and Exxon Mobil are among the top 10. It's been a good year for the strategy: The Revenue ETF has gained 18.4% in 2025, topping the SPDR S&P 500 ETF's 17.3% rise.
The fund is for investors who "want the mitigation of concentration but still want more exposure to Big Tech," says Nick Kalivas, Invesco's head of factor and core equity ETF strategy.
Weighting toward revenue does skew the fund toward value stocks, which had been a detriment to performance, but may now be a positive when the broader market's multiple is looking stretched. The Revenue ETF trades for 16 times 2026 earnings estimates, compared with a forward price/earnings ratio of above 22 for the S&P 500, and has gained 2.4% over the past month to the benchmark's 0.6%.
Skewing toward value also means owning more of the market's laggards, but there may be more risk in having too many eggs in one tech/AI basket. "You can't just pour into the winners. You have to avoid concentration," says Ryan Stever, chief investment officer of Intech, whose Intech S&P Large Cap Diversified Alpha ETF $(LGDX)$ launched in late February. "You can beat the cap-weighted indexes with more diversification."
Size still matters, of course. But owning a wider mix of companies that are also generating large revenue streams might be just as important.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 11, 2025 14:50 ET (19:50 GMT)
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