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Outsmart the S&P 500: Top Equal-Weight ETF for Small Investors

HomeOutsmart the S&P 500: Top Equal-Weight ETF for Small Investors

Outsmart the S&P 500: Top Equal-Weight ETF for Small Investors

Outsmart the S&P 500: Top Equal-Weight ETF for Small Investors

Summary

The world of index investing has witnessed a significant surge in popularity over the years, thanks to its simplicity and low fees. Warren Buffett, one of the most revered investors of our time, has even recommended putting one's money in an S&P 500 index fund as one of the smartest things they could do with their savings. Currently, investors can opt for various S&P 500 ETFs with extremely low expense ratios, as low as 0.03%. However, instead of sticking to traditional cap-weighted S&P 500 index funds like Vanguard's or SPDR's, a more innovative approach may be worth considering.

Why Do Things Differently?

The standard cap-weighted S&P 500 index fund tracks the change in price of the top companies in the benchmark, which are often characterized by high valuations and concentration. The top 10 companies in the S&P 500 currently make up over 37% of the entire index's value. This concentration can lead to a higher risk profile for investors. Moreover, these big companies tend to have high prices, pushing the overall forward P/E of the S&P 500 to above 22, which is a level rarely seen since right before the dot-com bubble.

In contrast, the equal-weight index takes all 500 components of the S&P 500 and tracks their change in price with equal weight at the start of each quarter. This approach provides additional exposure to smaller companies in the index, which have more room for growth. The appeal lies in distributing weight evenly across all components rather than focusing on large-cap stocks.

The Benefits of Equal-Weight Index Funds

While traditional cap-weighted S&P 500 ETFs have their merits, equal-weight index funds offer several benefits. Firstly, they provide additional exposure to smaller companies with more room for growth. Secondly, the concentration and valuation concerns associated with traditional S&P 500 ETFs are mitigated in equal-weight index funds.

Moreover, the history of equal-weight index funds indicates that they have outperformed their cap-weighted counterparts over the long term due to these factors. Although this hasn't been true over the last decade, the market typically exhibits reversion to the mean, which could benefit investors opting for an S&P 500 equal-weight index fund.

The Best S&P 500 ETF to Buy with $1,000

Given the characteristics and benefits of equal-weight index funds, one such option that stands out is the Invesco S&P 500 Equal Weight ETF (RSP). While it charges a slightly higher expense ratio compared to cap-weighted S&P 500 ETFs like Vanguard's or SPDR's, the added cost may be justified by potential mean reversion in smaller, lower-priced stocks.

Furthermore, the fund managers of Invesco have not produced any capital gains distributions for shareholders since its inception, eliminating additional tax drag from quarterly rebalancing. Investing in the Invesco S&P 500 Equal Weight ETF with $1,000 carries a risk of underperformance compared to cap-weighted index funds over the next decade.

However, considering current market conditions and valuations, it appears like an ideal opportunity for investors to overweight their portfolios towards smaller companies in the index and potentially outperform. This makes Invesco S&P 500 Equal Weight ETF a compelling choice among those looking to diversify their investment portfolio.

The Smartest S&P 500 ETF to Buy with $1,000 Right Now?

Before making an investment decision, consider this: the Motley Fool's Stock Advisor analyst team has identified what they believe are the top stocks for investors to buy now. Invesco S&P 500 Equal Weight ETF did not make it onto their list of top 10 picks.

However, past performance data from the Motley Fool shows impressive returns for their top stock recommendations. For example, when Netflix was recommended in December 2004, a $1,000 investment would have grown to approximately $652,133 by July 15, 2025. Similarly, when Nvidia was recommended on April 15, 2005, the same $1,000 investment would have been worth around $1,056,790.

While past performance is not a guarantee of future results, it's essential for investors to explore all available options before making an informed decision. The Motley Fool's top stock picks could provide significant returns in the coming years.

Conclusion

In conclusion, while cap-weighted S&P 500 index funds offer simplicity and low fees, a more innovative approach may be beneficial, especially given current market conditions. Investing in Invesco S&P 500 Equal Weight ETF with $1,000 carries risks but also offers opportunities for mean reversion and diversification of the investment portfolio.

For investors considering investing their money in an S&P 500 ETF with $1,000, it's essential to weigh the benefits and risks associated with each option. The Motley Fool's top stock picks may provide additional insights into successful long-term investments.

The best course of action is to explore different options, educate oneself on market conditions and valuations, and consider diversifying one's portfolio towards smaller companies in the index for potentially better returns over time.