The Stock Market Flashes a Warning Never Seen Before: 2 Brilliant Index Funds to Buy Now

The 10 largest companies in the S&P 500 (SNPINDEX: ^GSPC) currently account for about 40% of the index's weight. That is well above the long-term average of approximately 20%. In fact, the U.S. stock market has never been so concentration at any point in history.

Some analysts are unconcerned, but others are alarmed by that development. "If historical patterns persist, high concentration today portends much lower S&P 500 returns over the next decade than would have been the case in a less concentrated market," says David Kostin, chief U.S. equity strategist at Goldman Sachs.

Investors can hedge against that concentration risk with two alternative S&P 500 index funds: the Invesco S&P 500 Revenue ETF (NYSEMKT: RWL) and the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP).

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The Invesco S&P 500 Revenue ETF

The Invesco S&P 500 Revenue ETF tracks the S&P 500, but the stocks are weighted based on trailing-12-month revenue rather than market capitalization. The index fund imposes a 5% weight cap, meaning no stock can exceed 5% of its total market value.

The five largest positions are listed by weight below:

1. Amazon: 3.8%
2. Walmart: 3.8%
3. UnitedHealth Group: 2.3%
4. CVS Health: 2.1%
5. Alphabet: 2.1%

The benefit of the Invesco S&P 500 Revenue ETF is that it eliminates the concentration risk tied to market cap-weighted alternatives, which can make it more resilient. The index fund declined just 15% last year when President Trump announced tariffs, whereas the S&P 500 dropped 19%.

However, avoiding concentration risk has historically led to underperformance. The Invesco S&P 500 Revenue ETF has returned 545% since its inception in 2008, whereas the S&P 500 has returned 630%. That pattern could continue in the future. The top 10 stocks in the S&P 500 account for 35% of the index's earnings, so simultaneously accounting for 40% of its weight is not that unreasonable.

The Invesco S&P 500 Revenue ETF has a relatively high expense ratio of 0.39%, so investors will pay $39 annually on every $10,000 invested. Ultimately, this index fund is a good option for anyone worried about the S&P 500's unprecedented concentration. But investors should be aware that earnings growth typically correlates better than revenue growth with long-term performance.

The Invesco S&P 500 Equal Weight ETF

The Invesco S&P 500 Equal Weight ETF measures the performance of the S&P 500, but the constituents are weighted identically rather than by market capitalization. In other words, no stock impacts the performance of the index fund more than any other stock.

Whereas the revenue-weighted index fund introduced a new source of concentration -- that is, companies that report more revenue were weighted more heavily than those that report less revenue -- the Invesco S&P 500 Equal Weight ETF eliminates concentration risk in all forms.

The Invesco S&P 500 Equal Weight ETF underperformed the S&P 500 by more than 100 percentage points over the last decade. That happened because a handful of large stocks (especially the "Magnificent Seven") generated substantial returns, driven by robust earnings growth. If that continues, the equal-weight index fund will continue to underperform.

The last item of import is the fee structure. The Invesco S&P 500 Equal Weight ETF has a modest expense ratio of 0.2%, meaning investors will pay $20 per year on every $10,000 invested in the fund. While less expensive than the industry average of 0.34%, the equal-weight index fund is still more expensive than these traditional S&P 500 index funds.

Ultimately, the Invesco S&P 500 Equal Weight ETF is a good option for investors who want exposure to the S&P 500 without any concentration risk.

Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Goldman Sachs Group, and Walmart. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.