S&P 500 ETFs Face Off: Why RSP Could Outshine SPY in a Risky Market

By Rich Duprey Published Aug 15, 12:48PM EDT

Key Points in This Article:

The S&P 500 has surged 27% in 2024, driven by AI-fueled Magnificent Seven stocks, boosting SPY’s performance.
Concentration in 10 stocks raises risks, as SPDR S&P 500 ETF Trust‘s (SPY) tech-heavy gains contrast with Invesco S&P 500 Equal Weight ETF‘s (RSP) balanced approach.
Since 2003, RSP has outperformed SPY, suggesting its diversification could better weather a market correction.

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S&P 500 ETFs Face Off: Why RSP Could Outshine SPY in a Risky Market — © Ground Picture / Shutterstock.com

The S&P 500 has been a cornerstone of wealth-building for decades, delivering average returns of about 10% annually through diversified exposure to America’s largest companies.

Since the advent of the artificial intelligence (AI) era, roughly marked by the 2020s, the index has soared, with a 27% gain in 2024 alone, following a 24% rise in 2023. The gains were driven largely by the “Magnificent Seven” — tech giants like Nvidia (NASDAQ:NVDA | NVDA Price Prediction), Microsoft (NASDAQ:MSFT), and Meta Platforms (NASDAQ:META).

These AI-fueled leaders have propelled exchange-traded funds (ETFs) like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) to new highs, capitalizing on the market’s tech-heavy momentum. However, this dominance has created a top-heavy index, raising concerns about concentration risk. While SPY has outperformed the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) recently, RSP’s long-term track record since its 2003 inception shows superior returns.

Investors now face a choice: ride SPY’s tech-driven wave or opt for RSP’s balanced approach to mitigate emerging risks.

The S&P 500’s Concentration Crisis

The S&P 500’s once-broad diversification has eroded, with just 10 stocks — Nvidia, Microsoft, Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Meta, Broadcom (NASDAQ:AVGO), Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), Tesla (NASDAQ:TSLA), and JPMorgan Chase (NYSE:JPM) — now accounting for roughly 40% of its market capitalization, a multi-decade high. This concentration surpasses the 27% seen at the 2000 dot-com peak and reflects the outsized influence of tech giants fueled by AI enthusiasm. These top 10% of U.S. stocks, including the S&P’s leaders, represent a record 76% of the U.S. equity market, echoing pre-Great Depression levels.

This gap — where 10 stocks generate only 30% of index earnings but 40% of its value — signals overvaluation risks. If these tech titans falter due to regulatory scrutiny, AI hype cooling, or economic shifts, the index — and thus SPY — could face sharp declines, reminiscent of the 2000 to 2002 crash when the S&P 500 fell nearly 50%.

SPY’s Recent Dominance

SPY, tracking the market-cap-weighted S&P 500, has thrived in the AI era, capitalizing on the meteoric rise of the Magnificent Seven. Its market-cap weighting tilts heavily toward these high-flying tech stocks, leading to a 5.5% gain in July alone, with Nvidia accounting for 46% of that move.

SPY’s low expense ratio of 0.09% and massive liquidity make it a go-to for investors seeking broad market exposure. Since 2020, SPY’s tech-heavy composition has driven significant outperformance over RSP, as the top 10 stocks’ valuations soared.

However, this reliance on a few mega-caps amplifies volatility. High P/E ratios, averaging 29.5x for the index, suggest overstretched valuations, and a tech sector downturn could drag SPY down disproportionately.

While SPY’s recent gains are impressive, its dependence on a handful of stocks heightens risk, especially if market sentiment shifts.

RSP’s Long-Term Edge

Since inception, RSP, which equally weights all 500 S&P companies, has outperformed SPY, offering a more balanced exposure that mitigates concentration risk. RSP has a total return of 975% compared to the 962% return of SPY.

With an expense ratio of 0.20%, RSP reduces reliance on mega-caps, giving smaller firms like Lamb Weston (NYSE:LW) or Enphase Energy (NASDAQ:ENPH) equal footing. This approach has historically delivered better risk-adjusted returns, especially during market corrections when tech-heavy indices falter.

For instance, RSP’s equal-weight strategy cushioned losses during the 2000 to 2002 dot-com crash aftermath, as it avoided overexposure to overvalued tech stocks. Today, with the S&P 500’s top 10 stocks at a record 40% of market cap, RSP’s diversification across sectors like industrials (1.6%), financials (14.9%), and consumer discretionary (10.2%) offers a hedge against a potential tech bubble burst. Investors seeking stability in a volatile market may find RSP’s structure more resilient.

Key Takeaway

Despite SPY’s recent outperformance, RSP is the better buy today. Its equal-weight approach counters the S&P 500’s 40% concentration in 10 stocks, reducing exposure to tech volatility. With a proven long-term edge since 2003, RSP offers diversified stability in an overvalued, top-heavy market, making it a safer bet.

About the Author Rich Duprey →

After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, and Money Morning. He has been interviewed for both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.