ETF

Case study: Reducing market concentration through efficient equal weighting

Case study: Reducing market concentration through efficient equal weighting

Key takeaways

The challenge

1

The top 10 names in the S&P 500 currently account for 38% of the index and their contribution to risk is 53%, near historical highs over the past 25 years.

The opportunity

2

Equal weighting can help reduce exposure to the largest names in the S&P 500 while tiling a portfolio toward companies with more attractive valuation metrics.

The solution

3

Utilize the Invesco S&P 500 Equal Weight ETF (RSP) as a turnkey solution to address concentration concerns. As of March 31, 2025, asset owners allocated over $3.1 billion to RSP.

Asset owners including pension plans, endowments, and foundations are concerned about a record level of concentration within the S&P 500 index. Equal weighting is a popular way to reduce market concentration, but these clients need a vehicle that has ample liquidity to accommodate large allocations. A range of institutional clients have allocated billions into the Invesco S&P 500 Equal Weight ETF (RSP), demonstrating the investment use case as well as the efficiency of ETFs in meeting their needs.

The challenge

As shown in the chart below, the top 10 names in the S&P 500 currently account for 38% of the index and their contribution to risk (measured by standard deviation) is 53%. This means that over half of the risk of the index can be explained by only 2% of the companies within the index (10 / 500).

The opportunity

RSP may be appealing for asset owners looking to enhance diversification within their US equity portfolio and tilt towards companies with more attractive valuation metrics. The ETF and its underlying index equally weight all the constituents in the S&P 500 Index at each quarterly rebalance. Relative to the benchmark S&P 500, the S&P 500 Equal Weight Index tilts towards small size, value, and dividends.

High valuations in mega-cap technology names have pushed the S&P 500’s price-to-earnings (P/E) ratio to 26.9, a 29% premium over the S&P 500 Equal Weight Index. The divergence widened during COVID and accelerated further as AI spending benefited the largest tech companies. The premium remains near its high over the past 15 years while the average over this period is 2%.

The solution

As of March 31, 2025, institutional asset owners allocated over $3.1 billion to RSP. In February 2025, a public pension plan initiated a $794 million Volume Weighted Average Price (VWAP) block trade in RSP. They executed the trade at -0.24 basis points versus end of day Net Asset Value (NAV), illustrating the liquidity and efficient execution available to institutional investors.1

Explore how ETFs can help enhance institutional portfolios

Contact our institutional ETF team to learn more about RSP and how it can support institutional investors’ portfolio needs.

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    Sources: Bloomberg, Invesco as of March 31, 2025

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