RSP vs. VOO: Choosing the Best Way to Invest in the S&P 500

From 2023 to 2025, the S&P 500 (SNPINDEX: ^GSPC) was the place to be. With a heavy concentration in the "Magnificent Seven" stocks, it outperformed most sectors and other themes that weren't exclusively invested in tech and/or growth stocks.

This year, however, has been a different story. Investors have begun thinking twice about how much artificial intelligence (AI) spending is too much, whether companies will see an adequate return on their investments, and if the rapid growth rates we've seen recently are sustainable.

Now, tech has gone from leader to laggard. It has been one of the worst-performing sectors year to date and diversification is paying off again. The traditional S&P 500 is underperforming the majority of sectors, but the equal-weight version of the index is doing relatively well. The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) has gained nearly 6% this year (as of March 3) vs. flat performance from the Vanguard S&P 500 ETF (NYSEMKT: VOO).

These two weighting schemes produce very different portfolios. Current market trends clearly favor the equal-weight version, but obviously not in all situations.

Image source: Getty Images.

The case for the traditional S&P 500

The biggest feature of the Vanguard S&P 500 ETF is its allocation to technology stocks. Even after the recent market underperformance, it's still a whopping 33% of the index.

That means two things: One, the index is very top-heavy and its results are heavily dependent on just a handful of stocks, and two, it's much more appropriate for a risk-on environment where investors are seeking out tech and growth investments.

In other words, the S&P 500 is great when tech is leading the way. When tech lags, the index's flaws get exposed.

The case for the equal-weight S&P 500

The Invesco S&P 500 Equal Weight ETF represents a much more diversified version of the index. Its top sector holdings are industrials (17%), financials (14%), technology (13%), and healthcare (12%). Thanks to the equal-weighting of 500 different stocks, even the largest individual holdings only account for around 0.3% of the portfolio.

This ETF, not surprisingly, outperforms when more areas of the market are participating in gains. Given that eight of the 11 S&P 500 sectors are beating the index this year, it's having its best year relative to the traditional index in some time.

This is a great way to stay invested in U.S. large caps. But the sector mix gives it more of a defensive feel.

S&P 500: Cap-weight or equal-weight?

This really depends on how you feel about the tech sector.

Over several years, tech is probably a good bet to outperform the index with higher volatility along the way. Currently, however, tech is in a funk and could remain so for a while as valuations draw concerns and the U.S. economy looks questionable.

Overall, I think the Vanguard S&P 500 ETF makes more sense as a long-term holding given that it can better take advantage of its tech and growth overweights. In the short term, however, the diversification and relative risk mitigation of the Invesco S&P 500 Equal Weight ETF probably makes more sense.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.