ETFs vs Individual Stocks: Why Equal-Weight Indexing Might Be Your Better Move

The Case Against Concentration Risk

When most investors consider index funds, they naturally gravitate toward traditional market-cap-weighted options. The Vanguard S&P 500 ETF stands as the poster child for this approach. And for good reason: over the past 15 years, the S&P 500 has beaten roughly 88% of large-cap managed funds, according to S&P Dow Jones Indices data (as of June 30), with similar outperformance of 86% observed over the preceding decade.

However, this conventional wisdom masks a structural vulnerability that savvy investors should understand. Market-cap-weighted construction means bigger companies dictate index movement. Currently, five mega-cap names—Nvidia, Microsoft, Apple, Amazon.com, and Meta Platforms—command nearly 28% of the index despite representing just 1% of the 500 constituent companies. This concentration becomes precarious if these leaders stumble.

Are ETFs Better Than Stocks? The Equal-Weight Alternative

Rather than choosing between individual stock picking and passive index investing, consider a middle path: the Invesco S&P 500 Equal Weight ETF, which allocates roughly equal proportions across all 500-plus components. This structural difference means those five dominant holdings would represent only 1-2% of your portfolio allocation.

This approach delivers an asymmetric advantage: when smaller capitalization stocks outperform their larger counterparts—a regular market occurrence—equal-weight ETFs capture that outperformance more effectively. The fund remains fully indexed, eliminating single-company risk inherent in stock picking, while reducing the concentration trap of cap-weighted alternatives.

Why This Matters for Your Portfolio

The tension between active stock selection and passive indexing often overshadows a third option: strategic index construction. Equal-weight indexing preserves the benefits of diversification and low fees while tilting exposure toward smaller components that traditional indexes underweight. The S&P 500 updates continuously, removing stagnant companies and welcoming emerging performers—but cap-weighted mechanics ensure recent market leaders capture disproportionate index influence regardless of forward potential.

By maintaining equal-weight positioning, this ETF structure offers steady growth potential over multi-year horizons with potentially lower volatility than cap-weighted alternatives, particularly during periods when megacap leadership transitions.

The Bottom Line

Whether you’re questioning the merit of traditional index funds or debating stock picking versus ETF investing, equal-weight indexing deserves serious consideration. It answers a fundamental portfolio design question: must concentration follow market capitalization, or can more balanced exposure deliver superior risk-adjusted returns?