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Investors have poured record amounts of money into a fund that evenly distributes its assets across the S&P 500, as concerns grow that Wall Street's returns have become overly dependent on a handful of technology giants.
The Invesco S&P 500 Equal Weight exchange-traded fund took in about $14.4 billion in the second half of 2024, according to data from Morningstar, as investors hedged against the dominance of large technology stocks.
This increase brought the fund's total inflows to $17 billion for the year, and comes after consecutive years of the fund underperforming the S&P. Analysts said this highlights how concerned investors are about the shadow cast by the Magnificent Seven technology Stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
Last year, the Standard & Poor's index rose 24 percent, and the seven stocks were responsible for about half of the index's gains, according to the Standard & Poor's Dow Jones indices. The equal-weight index rose just 11 percent, as the quarterly rebalancing exercise favored lower-growth equity shares.
“Investors' biggest focus recently has been on concentration risk, and concerns that the market is too overweight,” said Manish Kabra, head of US equity strategy at Société Générale. It is expected to see double-digit profit growth exceeding the largest technology companies this year.
“If that happens, you don't need to be so defensive,” he said, adding: “A lot of people I meet point to the 11 percent rise in the equal-weighted index last year and say it makes sense to invest there.” of expecting returns in excess of 20% (of the market cap weighted S&P 500 index) each year.
The Invesco fund sells the S&P leaders and buys the laggards every quarter when it rebalances, to give each of its holdings an equal share of the fund's assets. This approach was useful in 2022, as the largest stocks in the index bore the brunt of that year's selloff.
Despite its poor performance, the fund has raised more than $72 billion and made it one of the 25 largest U.S. ETFs by total assets, according to Morningstar. The offering surpassed the EIF's previous best level of inflows of about $12.8 billion in 2023, according to Morningstar.
Investors are also turning to derivatives, such as CME Group's equal-weight S&P 500 futures, to bet on the S&P while hedging against a sharp decline in technology stocks. The contract, which was launched in February, has averaged open interest of 16,500 contracts this month, worth about $2.4 billion.
The sharp decline in Magnificent Seven shares in July and August led to a jump in interest in the contract, said Paul Woolman, global head of equity products at the Chicago Mercantile Exchange. “I think this has woken up more clients in terms of how to manage those risks and what kind of strategies they should implement.”
“It is a reflection of market participants wanting to diversify into cheaper assets and not just chase performance,” said Alessio De Longis, head of investments at Invesco Solutions, the multi-asset arm of the $1.8 trillion fund manager. Interest in equal weight.
However, using a fund that has been adjusted to give each company equal weighting is unlikely to be the previous way to avoid concerns about market concentration, said Brian Armour, director of passive strategies research at Morningstar.
“Incorporating fundamentals into each company's valuation would serve investors better than arbitrarily making them all equally weighted,” Armor said. “At the very least, this would better reflect the market's identity.”
The shift in sentiment could help sectors such as energy, metals, mining and other industrial stocks, said Rick de los Reyes, portfolio manager at T Rowe Price. “There is some excitement around the parts of the market that are being left behind, and the view that you might finally start to see some strength,” he said.
