The Magnificent Seven stocks just haven't lived up to their name this year. But that hasn't stopped the market from rallying. That could be a signal that it's a good time to buy into funds with exposure to the broader market-even if they cost a little more.
Big Tech stocks have led the market since the launch of ChatGPT in late 2022 gave rise to the artificial-intelligence economy. But the Roundhill Magnificent Seven exchange-traded fund is up just 1% in 2026, while the S&P 500 index has gained nearly 13%. That strength is a testament to the broadening out of the rally.
In fact, when you look at the index on an equal-weighted basis, which reduces the impact from megacap stocks like Nvidia, Apple, and the rest of the Mag Seven, the S&P 500 looks even stronger. The Invesco S&P 500 Equal Weight ETF, or RSP, is up about 16% in 2026.
It's a sign of how the market has increasingly grown comfortable with oil stocks, banks, and drug companies taking leadership positions as semiconductors, software, and other parts of technology have been hit because of concerns about spending on artificial intelligence.
"Money has rotated into other sectors. The equal-weighted index has done a lot of the heavy lifting," said Brett Ewing, chief market strategist for First Franklin Financial Services. Ewing told Barron's that his firm has recently boosted its price target for the S&P 500 from 8000 to 8200, largely on expectations for a continued broadening of the rally.
Still, it's worth remembering that the equal-weighted ETF has lagged behind the cap-weighted index over the past decade. A market-cap weighted S&P 500 fund might at first blush seem to be a better bet, especially since equal-weighted funds tend to have higher expense ratios.
The Vanguard S&P 500 ETF and iShares Core S&P 500 ETF both have expense ratios of just 0.03% while the granddaddy of index ETFs, the State Street SPDR S&P 500 ETF Trust, has an expense ratio of just under 0.1%. That makes them a lower-cost option than most of the equal-weighted ETFs out there.
The Goldman Sachs Equal Weight U.S. large-cap Equity ETF has an expense ratio of just 0.09%. But RSP costs 0.2%. Invesco's 11 equal-weighted sector ETFs all have an expense ratio of 0.4%. And the First Trust Nasdaq-100 Select Equal Weight ETF, which equally weights the popular Nasdaq 100 index, costs 0.55%. That's nearly triple the 0.18% expense ratio for the cap-weighted Invesco QQQ Trust. Those higher fees add up over time, eating into returns for long-term investors.
Nicholas Colas, co-founder of DataTrek Research, doesn't see that as a huge problem, though. He told Barron's that investors looking for more diversity should still consider an equal-weighted approach. It's not as dependent on the AI trade.
"Volatility of the market-cap weighted S&P 500 is now 25% higher than the equal weighted index. So you'd have to get much bigger returns to justify holding the cap-weighted ETF," Colas said, adding that the fees for the equal-weighted funds are "not prohibitively high."
Tavis McCourt, institutional equity strategist at Raymond James, agrees. He said equal-weighted index funds might outperform the Mag Seven and the cap-weighted S&P 500 for the foreseeable future. In other words, the equal-weighted strategy may be worth those higher expenses if you believe that the broadening will continue.
"The market-cap weighted index is so concentrated and has been whipsawed by the AI momentum trade. That's not telling the full story of the market," McCourt told Barron's.
"When the traditional and more cyclical economy is improving like it has been, typically equal-weight indexes will do better," he added, noting that this is also the case for smaller and midsize stocks. The Russell 2000 index, for example, is up 22% this year while the S&P MidCap 400 index has gained 17%.
Michael Sansoterra, chief investment officer at Silvant Capital Management, also thinks an equal-weighted approach to investing will pay dividends. "The largest tech companies were driving the lion's share of the market's gains. But this broadening is healthy," he told Barron's. "You don't want the rally to only be about large-cap growth."
Sansoterra said the combination of accelerating earnings growth and multiple expansion will push an equal-weighted approach higher. Earnings for the companies in the RSP ETF are expected to rise 20% this year compared with a 10% increase in 2025. And the fund trades for just 17.5 times this year's earnings forecasts, a 20% discount to the S&P 500's multiple of 21.5 times earnings estimates.
As long as companies outside the Mag Seven are reporting strong profits, equal-weighted index funds could be worth the price.
Comments