Equal-Weight RSP Becomes a Magnificent Seven Hedge

Outsized performance by seven stocks turns indexes into lopsided growth plays.

As a handful of high-flying stocks continue to drive the overall performance of popular market-cap weighted indexes, financial advisors might need to start thinking differently to prevent client portfolios from being overly exposed to growth. 

While it’s fun and easy to celebrate the stratospheric heights of the so-called Magnificent Seven stocks that have collectively gained more than 75% this year, it is pushing big boring indexes like the SPDR S&P 500 ETF Trust (SPY) beyond their core boundaries. 

To appreciate how market-cap weighted indexes are becoming lopsided on the growth side, consider that there is now a 45% overlap between the S&P 500 Index and the more growth-oriented Nasdaq 100 Index. Ten years ago, that overlap was around 25%. 

Also, with the 10 largest stocks in the S&P 500 making up about a third of the index, the overlap between the S&P 500 and the S&P 500 Growth Index has swelled to 68%. 

RSP Dilutes the Magnificent Seven Stocks 

The recent direction of asset flows into the Invesco S&P 500 Equal Weight ETF (RSP) suggests some investors and advisors are realizing a new path to keeping portfolios in balance. 

Since the recent Oct. 27 low, the $47 billion RSP has experienced $3.7 billion worth of net inflows while rallying by 16.3% over that period. 

By comparison, the much larger $459 billion SPY has taken in $18.4 billion while gaining 14.6% over the same period. 

Nick Kalivas, head of core and factor ETF strategy at Invesco, attributes the rising appeal of RSP to investors and financial advisors looking beneath the surface of some of the most popular broad market indexes. 

“As people assess the macro backdrop, they’re becoming more comfortable with the soft-landing scenario and the direction of interest rates, and as a result they’re more comfortable with companies down the market cap spectrum,” he said. 

RSP vs. SPY: Concentration Risk 

In essence, by giving more weight to those companies operating in the shadows of the Magnificent Seven, investors are navigating a level of concentration risk in the S&P that hasn’t been seen in 50 years. 

“People are starting to think about valuations in the large cap space and that creates discomfort in investors that are investing in cap-weighted indexes,” Kalivas said. “As you invest, more money is going to overvalued companies and less is going into the companies that have lagged.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter