Investing in an exchange-traded fund (ETF) can be an excellent way to diversify your portfolio -- but not always. If you look at many top-performing ETFs right now, you'll see a common theme: Apple, Microsoft, and Nvidia are often the top holdings. As the three most valuable stocks in the world, they often account for a significant chunk of an ETF's holdings, perhaps too much. These stocks have performed extremely well in recent years, which explains why ETFs that have done well would have large positions in them.
But if you're investing today, you may not want to invest in those types of ETFs. You may not even want ones that track the S&P 500, which may also be a bit too exposed to not just those three stocks but tech stocks as a whole. A potentially safer option to consider is the Invesco S&P 500 Equal Weight ETF (RSP -0.68%).
A more balanced approach to investing in the S&P 500
If there's a correction in tech stocks, the S&P 500 could quickly come crashing down. All it may take is for one of the big three (Apple, Microsoft, Nvidia) to post an underwhelming quarter or release light guidance that raises flags for investors, which could create panic in the market. Since these and many other tech stocks are doing well due to similar reasons (rapid growth in artificial intelligence), they could all end up crashing together.
While that's a possibility, it's not a sure thing that a crash will happen, either. But regardless of whether you're worried about a crash or not, you may simply want a safer, more balanced way to invest in the S&P 500. The Invesco S&P 500 Equal Weight ETF invests in all the stocks that are in the index, but since they all have equal weights, you won't have to worry about any individual stock having a significant effect on the ETF's overall performance. Even among the Invesco fund's top holdings, no stock accounts for 1% of the total weight.
The downside is that when top stocks are performing well, the equal-weighted fund won't do nearly as well. That's evident when you compare its five-year returns against those of the S&P 500.
Minimizing risk can be key heading into a potential downturn
The stock market has been hitting record levels this year, and excitement only seems to be growing after President-elect Donald Trump's recent election win. The danger is that there's still a risk of a recession out there, although the probability depends on who you ask. Goldman Sachs recently put the odds of a recession at 15% over the next 12 months. In the summer, JPMorgan said there was a 35% chance of a downturn beginning before the end of this year.
But even if a full-blown recession doesn't happen, a hint of a slowdown could make investors apprehensive, particularly about highly valued stocks. The markets, after all, move based on not just actual results and economic performance, but also on investor sentiment and expectations. Right now, there's still a lot of excitement. But if that changes, the tide could turn and tech stocks that are trading at significantly high valuations could be ripe for sell-offs. This is why an equal-weighted S&P ETF could make a lot of sense for investors, even though it has underperformed the index in the past.
Is this a strategy that's right for you?
If you find yourself sitting on the fence and not sure of which stocks to invest in, then the Invesco ETF may be a practical option for you. You're getting a lot of quality stocks with a single investment, and you also don't have to be overly concerned about having too much exposure to just a few companies.
The ETF won't protect you from a market crash, but it can offer a bit more safety than other, less diversified investments. Although it hasn't been outperforming the S&P 500 index in recent years, that could change as investors potentially shift to better value buys amid worsening economic conditions.
Invesco's equal weight ETF may not be an ideal option for growth-oriented investors, but it can be a suitable choice for investors who are looking for safer ways to invest in the stock market today.
