By Debbie Carlson
Financial pros have long urged investors to hold diversified portfolios -- and the risk posed by stock indexes' persistently heavy tech stock concentration has amplified those calls. Some investors are finally taking the hint.
The S&P 500 index ended the volatile first quarter down 4.7%. Over that period, investors diversified into bond and international stock exchange-traded funds amid an uptick in inflation expectations, skepticism over companies' spending on artificial-intelligence buildouts, and heightened geopolitical concerns.
One ETF hoovering assets suggests that some investors are also diversifying by flirting with non-capitalization-weighting strategies. The $85.4 billion Invesco S&P 500 Equal Weight ETF snagged around $10 billion in new money last quarter, according to VettaFi and FactSet data, putting it in the top 10 of asset-gatherers.
As the name implies, equal weighting gives each index constituent the same allocation, instead of ranking by market cap. In the case of the Invesco fund, the top 10 holdings constitute only 2% of its total assets. In the classic market-cap-weighted version of the S&P 500, the top 10 names comprise nearly 40% of the index.
Investors in the Invesco ETF get more exposure to the smaller names in the S&P 500, giving it a value tilt without abandoning the large-cap style or focusing on a narrower slice of the market. The fund is rebalanced quarterly to keep holdings in check.
It's working so far. The Invesco fund is up 4.2% year to date, while traditional S&P 500 ETF index funds, such as the $1.4 trillion Vanguard S&P 500 ETF, are flat on the year.
The Invesco fund is one of several equal-weight ETFs outperforming their market-cap siblings this year, including First Trust Dow 30 Equal Weight, Direxion Nasdaq-100 Equal Weighted Index, and Invesco S&P 500 Equal Weight Technology.
Tim Thomas, the chief investment officer of Badgley Phelps Wealth Managers, uses an equal-weight strategy for some portfolios. He says it's a way to de-emphasize the Magnificent Seven names, but also to take advantage of lower valuations on the other 493 stocks in the S&P 500 and the expectation that earnings growth will broadening this year.
"You've got this kind of sweet spot where you've got more attractive valuations, and you've got a return to earnings growth, and it's a really nice setup." he says. "That should continue to serve the equal-weight strategy."
Nick Kalivas, head of core equity ETF strategy at Invesco, says the firm's financial advisor feedback suggests that not only do equal-weight strategies resonate with the broader earnings growth story and diversification goals, but they also allow investors to recalibrate core S&P 500 holdings, which have become larger and more growth-focused in general as tech names have dominated.
"I'm not saying there's anything wrong with growth, but I think a lot of clients already have exposure to growth in other avenues besides just the core of their portfolio in the S&P 500," he says.
The equal-weight fund's asset grab wasn't a fluke. The $8.5 billion Invesco S&P 500 Revenue ETF, which weights companies by revenue, accumulated a net $813 million in the first quarter.
Equal weight and revenue weight are "smart beta" strategies, an umbrella term for rules-based approaches other than traditional market cap. Todd Rosenbluth, head of research at TMX VettaFi, says these strategies are relevant in the current environment and can complement existing core portfolio holdings.
Non-market-cap strategies still offer exposure to tech names, but often favor smaller-cap tech companies, he says, and they increase exposure to less-represented sectors such as real estate and utilities.
Another popular smart-beta approach is fundamental weighting, which weights stocks by economic scale, breaking the link between price and portfolio weight. It can create a diversified portfolio of higher-quality names with a smaller cap and value bias compared with market-cap-weighted indexes, says Que Nguyen, chief investment officer of equity strategies at Research Affiliates.
Fundamental weighting has underperformed the S&P 500 during the tech-led rally, but as earnings growth broadens, fundamental weighting can benefit from owning companies that deliver steadier returns and stronger, faster earnings growth than equal weight, she says.
The largest ETF following this strategy is the $9.1 billion Invesco FTSE RAFI US 1000.
Cash-flow-based ETFs also follow the fundamental-weight concept. Pacer U.S. Cash Cows 100 uses the Russell 1000 index to select large-cap companies with the highest average projected free cash flow and earnings for the next two fiscal years. VictoryShares Free Cash Flow also uses projected free cash flow but includes revenue and earnings.
Rosenbluth points to dividend-based ETFs as a third smart-beta approach to limit concentration risk. The strategy prioritizes income-generating stocks, weighting them by yield or total dividends paid. He notes the $1.3 billion ALPS Sector Dividend Dogs ETF uses the "Dogs of the Dow" theory that high-yielding equities tend to appreciate faster than lower-yielding equities. It owns the five highest-yielding stocks in 10 different sectors, for a total of 50 names, and equal-weights them.
With so much uncertainty in the world, "dividends make a lot of sense," says John Davi, founder of Astoria Portfolio Advisors. "We think the concept of getting paid while you wait is interesting." He likes the $15 billion WisdomTree US Quality Dividend Growth ETF, which focuses on the potential for dividend growth rather than backward-looking dividend increases.
Investors who want to reduce concentration but keep a traditional market-cap weighting could add sector funds to their portfolio, Davi says. He notes that an elevated inflation environment historically benefits sectors such as energy, industrials, and materials.
He is also using ETFs that could benefit from current trends. Those include Virtus Reaves Utilities for exposure to data-center growth, and Invesco KBW Bank, suggesting that banks may benefit from less regulation and the potential for several big initial public offerings this year, including SpaceX and OpenAI.
"I think folks are catching on that it is time to go back to diversification and basic principles of investing," he says.
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April 15, 2026 03:00 ET (07:00 GMT)
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