Investors have poured a record amount of money into a fund that allocates assets evenly to the S&P 500 as concerns grow that Wall Street's returns are overly reliant on a handful of technology giants.
Invesco S&P 500 equal-weighted exchange-traded funds absorbed about $14.4 billion in the second half of 2024 as investors hedged against the dominance of large-cap technology stocks, according to Morningstar data.
Total inflows to the fund surged to $17 billion this year after years of underperforming the S&P. Analysts said this underscores investor concerns about the shadow cast by the "Big Seven" technology stocks - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
The S&P rose 24% last year, with seven stocks accounting for about half of the index's gains, according to S&P Dow Jones Indices. The equal-weighted index gained just 11% as the quarterly adjustment favored lower-growth stocks.
"Investors' biggest focus of late has been on concentration risk and worries that the market is too top-heavy," said Manish Kabra, head of U.S. equity strategy at Societe Generale, who expects earnings growth this year to exceed that of the largest technology companies.
“If that happens, you don’t need to take such a defensive stance,” he said, adding, “A lot of people I meet point to the 11% gain in the equal-weighted index last year and say invest there. Makes more sense." Returns of more than 20x per year (based on the market cap-weighted S&P 500). "
The Invesco fund sells the S&P's leading stocks and buys its laggards each quarter when it rebalances to give it an equal share of the fund's holdings. This approach is beneficial in 2022, as the index's largest stocks have borne the brunt of the year's selloff.
Despite its poor performance, the fund has amassed more than $72 billion, making it one of the 25 largest U.S. ETFs by total assets, according to Morningstar. The ETF's 2023 flows were about $12.8 billion, surpassing its previous high, according to Morningstar data.
Investors have also turned to derivatives, such as CME Group's S&P 500 equal-weighted futures, to bet on the S&P while hedging against sharp losses in technology stocks. The contract was launched in February and average open interest for the month was 16,500 contracts worth about $2.4 billion.
Paul Woolman, head of global equity products at CME Group, said sharp declines in the share prices of seven major stocks in July and August led to a surge in interest in the contract. "I think it's awakening more clients on how to manage risk and what strategies they should pursue."
“This reflects Market participants want to invest in cheaper assets and are not just chasing performance” interest in equal weighting.
However, Brian Armor, director of passive strategy research at Morningstar, said past use of adjusting funds to give each company equal weight was unlikely to sidestep concerns about market concentration.
"Incorporating fundamentals into the evaluation of each company better serves investors than arbitrarily giving each company equal weight," Armor said. "At the very least, it will better reflect the identity of the market."
T Rowe Price portfolio manager Rick de los Reyes said a shift in market sentiment could help sectors such as energy, metals, mining and other industrial stocks. "There's excitement in those parts of the market that have been left behind, and people think you can finally start to see some strength," he said.