Worried That Overvalued Tech Stocks Could Weigh Down the S&P 500's Future Returns? Invest in This More Balanced ETF
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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 (NYSEMKT: RSP).
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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.