The S&P 500's Biggest Stocks Keep Getting Bigger. Here's the ETF I'd Buy to Diversify

Buying an S&P 500 index fund sounds like one of the easiest ways to diversify your money. After all, S&P 500 ETFs give you exposure to 500 of America's largest companies efficiently and with very little cost. In reality, they are easy ways to diversify, but there's a catch.

The S&P 500 is weighted by market cap. That means the largest companies in the index get the largest weightings. After years of huge gains in megacap tech stocks, the index has become more concentrated than it has at almost any point in history.

Today, roughly 37% of the Vanguard S&P 500 ETF (NYSEMKT: VOO) is invested just in its top 10 holdings.

That's been just fine when these stocks are outperforming. But if you're worried that your portfolio has become too dependent on just a handful of companies, there's another way to own the S&P 500.

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The S&P 500 isn't as diversified as it looks

Nvidia and Apple alone account for around 14% of the S&P 500. Add in Microsoft and Alphabet, and that number climbs to more than 25%. That's a huge percentage tied to just four major tech companies.

These are some of the most successful and profitable companies in the world, so that may not necessarily seem like an issue. But the problem is the risk of concentration.

An investor buying an S&P 500 ETF today isn't making the same investment someone made 10-20 years ago. The performance of today's index is much more dependent on what happens to its largest companies.

RSP solves the concentration problem

The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) owns the same companies as a traditional cap-weighted S&P 500 ETF, but as the name suggests, it gives each component an equal share.

That means Nvidia, Microsoft, Apple, and the rest of the Magnificent Seven names receive a roughly 0.2% weighting at the time of rebalancing.

This dramatically reduces the index's megacap concentration and gives it a meaningfully different sector composition. Its current top sector holdings are industrials, financials, tech, and healthcare. All are getting at least a 12% allocation.

Is it time to consider rotating?

The problem with investing in the Invesco S&P 500 Equal Weight ETF over the past few years has obviously been its underweighting of tech. If the megacap giants continue to lead the market, this ETF is likely to lag further.

But in 2026, we've seen a rotation out of the Magnificent Seven stocks that dominate the indexes. As a result, RSP is outperforming VOO by nearly 4% year-to-date.

We know investors are paying closer attention to valuations. Inflation is still well above target. The Fed may raise interest rates more than once before the end of the year. And the labor market is showing signs of slowing down.

All of these factors favor considering areas of the market other than tech going forward. The rotation has already begun in 2026, and it could be setting up to continue in the months ahead.

David Dierking has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.