Here's the Smartest Way to Invest in the S&P 500 in February
Key Points
The S&P 500's performance is significantly impacted by the rotation out of tech stocks and into other areas of the market.
S&P 500 investors might want to consider ways to reduce high concentration risk in the index.
Equal-weighting the S&P 500 allows investors to maintain large-cap exposure but also take advantage of the current market rotation.
- 10 stocks we like better than Invesco S&P 500 Equal Weight ETF ›
U.S. stocks are continuing to move higher to start 2026, but where those gains are coming from has completely changed.
Over the past three years, the S&P 500 (SNPINDEX: ^GSPC) has been pulled higher by a narrow group of megacap tech stocks. This year, tech is one of the worst-performing sectors, and others, including energy, consumer staples, and industrials, have taken its place as the leader.
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That doesn't mean investing in the S&P 500 is no longer a wise play. It may, however, mean you need to rethink the right way to approach it. Finding ways to reduce tech exposure within an existing large-cap portfolio allocation could work well in the current market environment.
Image source: Getty Images.
How an equal weighting changes the index's composition
In the traditional S&P 500, technology accounts for roughly 34% of the index. That's right around the same allocation the index saw during the peak of the tech bubble.
Equal-weighting the index maintains that tech exposure, but in a much less concentrated way. Plus, it lifts the weightings of several sectors that have been laggards in recent years but have performed much better recently. Considering the current market rotation happening within U.S. stocks, I believe the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) is the best way to invest in the index right now.
If you're worried about the risk of having too much of your portfolio in tech, growth, and the "Magnificent Seven" stocks, the Equal Weight ETF solves that issue immediately.
| Sector | S&P 500 | Equal Weight S&P 500 | Difference |
|---|---|---|---|
| Technology | 33.4% | 13.5% | (19.9%) |
| Financials | 12.9% | 14.8% | 1.9% |
| Communication services | 11% | 3.9% | (7.1%) |
| Consumer discretionary | 10.4% | 9.5% | (0.9%) |
| Healthcare | 9.4% | 11.9% | 2.5% |
| Industrials | 8.6% | 16.4% | 7.8% |
| Consumer staples | 5% | 7.4% | 2.4% |
| Energy | 3.2% | 4.6% | 1.4% |
| Utilities | 2.2% | 6.2% | 4% |
| Materials | 2% | 5.6% | 3.6% |
| Real estate | 1.9% | 6.2% | 4.3% |
Data source: S&P Global
The tech and communication services sectors, which house all of the Magnificent Seven stocks, get their combined 43.4% weighting in the S&P 500 trimmed all the way down to 17.4% in the equal-weight version. With the exception of consumer discretionary, every other S&P sector sees a meaningful increase in their index weight, especially those at the bottom of the list.
This produces a much more diversified portfolio. Eight of the 11 sectors have weightings of at least 6% and none gets more than 16%. The Invesco S&P 500 Equal Weight ETF has just 2.9% of its assets in the top 10 holdings, compared to 38% in the traditional S&P 500 index.
Valuation is also much more reasonable. The S&P 500 currently trades at a forward price-to-earnings (P/E) ratio of around 22. The equal-weight version has a forward P/E ratio of just over 17.
In short, the equal-weight S&P 500 is better constructed to take advantage of the current market rotation. Most importantly, it reduces the heavy reliance on the megacap tech stocks that are looking more vulnerable at the moment. As investors place more importance on relative value and quality in case conditions start turning south, an equal-weight S&P 500 helps take some of the larger tail risks off the table.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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