Avoid S&P 500 Concentration Risk with These Two ETFs

Invesco S&P 500 Equal Weight ETF (RSP)

The Invesco S&P 500 Equal Weight ETF

uses one of the simplest alternative weighting methodologies available. Instead of weighting companies by market capitalization, every stock in the S&P 500 is assigned the same weight. Each quarter, the portfolio is rebalanced so that every constituent once again represents approximately 0.2% of the fund, regardless of how large or small the company has become.

Its sector allocations look very different from the traditional benchmark. Technology accounts for roughly 15% of the portfolio, less than half of the weighting in the standard S&P 500, while industrials and financials each represent approximately 16% and 15%, respectively. Those sector weights will naturally evolve over time as quarterly rebalancing takes place.

The biggest advantage of this approach is that it introduces a systematic buy-low, sell-high discipline. As stocks outperform and become overweight, the ETF trims those positions back to their target weights. Likewise, companies that have lagged are topped back up during each quarterly rebalance.

The downside is that this can become a headwind during strong bull markets. As Peter Lynch famously warned, you can end up "trimming the flowers and watering the weeds."

By continuously trimming the market's biggest winners, equal-weight strategies may sacrifice some of the momentum that has historically driven market-cap-weighted indexes.

Its sector allocations look very different from the traditional benchmark. Technology accounts for roughly 15% of the portfolio, less than half of the weighting in the standard S&P 500, while industrials and financials each represent approximately 16% and 15%, respectively. Those sector weights will naturally evolve over time as quarterly rebalancing takes place.

Another drawback is cost. RSP charges a 0.20% expense ratio, more than ten times higher than the 0.02% charged by the State Street SPDR Portfolio S&P 500 ETF (SPYM). The higher turnover required to maintain equal weights inevitably makes the strategy more expensive to operate.

Fortunately, RSP has been around long enough to evaluate over a full market cycle.

From April 30, 2003 through July 15, 2026, the ETF delivered an annualized return of 11.26%, slightly trailing the 11.52% annualized return of the SPDR S&P 500 ETF Trust (SPY). RSP also experienced deeper maximum drawdowns and higher annualized volatility over that period, resulting in a lower Sharpe ratio of 0.55 compared with 0.59 for SPY.

Source: Testfolio

When RSP does outperform, it is often because the size factor comes back into favor.

The ETF naturally allocates far more to mid-caps. Today, however, I think there are cleaner ways to express that view. With inexpensive small-cap factor ETFs readily available, investors can target the size premium more directly instead of relying on the indirect exposure created by an equal-weight methodology.

One final advantage is that, despite the strategy's relatively high turnover, investors generally don't have to worry about the large taxable capital gains distributions often associated with equal-weight mutual funds. Thanks to the ETF creation and redemption mechanism, much of that turnover can occur in-kind, helping preserve tax efficiency.

Tema S&P 500 Historical Weight ETF (DSPY)

Investors looking for a more sophisticated approach to reducing S&P 500 concentration risk may find the Tema S&P 500 Historical Weight ETF

particularly appealing. Instead of assigning every constituent the same weight, DSPY reweights companies toward their historical average weights within the S&P 500.

Rather than assuming every company deserves an identical allocation regardless of its size, the ETF asks what a more typical representation of each company has been over time and gradually moves the portfolio back toward those historical norms.

DSPY is also slightly cheaper than RSP, charging a 0.18% expense ratio. Since launching in April 2025, it has attracted just under $1 billion in assets under management, suggesting investors have shown meaningful interest in the concept.

The resulting portfolio remains familiar to anyone accustomed to the S&P 500, but with noticeably better balance. Technology is still the largest sector at roughly 29%, significantly below its weighting in the traditional market-cap-weighted index. Financials account for approximately 15% of the portfolio, while industrials and health care each represent about 11%.

Because DSPY is still a relatively new ETF, performance data remain limited. That being said, from April 1, 2025, through July 15, 2026, the fund generated a 26.46% annualized return compared with 27.31% for SPY. Despite the slight performance lag, DSPY exhibited lower volatility, resulting in a marginally better Sharpe ratio of 1.25 versus 1.23.

Source: Testfolio

Personally, this is the approach I prefer over equal weighting. It addresses concentration risk without abandoning the economic intuition behind market-cap weighting. There is no fundamental reason that Apple should receive the exact same allocation as the smallest company in the S&P 500.

A historical-weighting methodology still acknowledges that larger companies deserve larger allocations because of their economic importance, but it avoids allowing a handful of recent winners to dominate the portfolio simply because their market capitalizations have expanded dramatically over a short period.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.