Comparing US Index Funds: Why Equal-Weight May Outperform Traditional Approaches

The Concentration Problem with Standard Market-Cap ETFs

If you’ve been researching US investment options, you’ve likely encountered strong endorsements for traditional S&P 500 index funds like the Vanguard S&P 500 ETF (VOO). These recommendations make sense on the surface — the S&P 500 has historically beaten approximately 88% of actively managed large-cap mutual funds over the past 15 years, and outperformed 86% over the past decade. Warren Buffett himself has championed low-fee index investing, making it seem like a no-brainer.

However, there’s a critical structural issue that often gets overlooked: market-cap weighting creates dangerous concentration risk.

Understanding Market-Cap Weighting vs. Equal-Weight Distribution

Traditional S&P 500 ETFs use market-cap-weighted methodology. This means the largest companies receive the heaviest influence on the index’s performance. Currently, the five largest holdings — Nvidia, Microsoft, Apple, Amazon.com, and Meta Platforms — represent nearly 28% of the fund’s value despite comprising only 1% of the 500 components.

This worked brilliantly during the recent tech rally when these mega-cap stocks surged. But what happens when they inevitably consolidate? The entire index moves with them. You’re essentially betting that a handful of companies will continue crushing expectations indefinitely — a risky proposition for long-term investors seeking diversification.

The Equal-Weight Alternative: Invesco S&P 500 Equal Weight ETF (RSP)

An alternative exists: the Invesco S&P 500 Equal Weight ETF, which reconstructs the S&P 500 with each of its 500-plus components held in approximately equal proportion. Instead of having top five holdings represent 28% of your portfolio, each position would comprise roughly 1-2% of the fund.

This structural difference creates meaningful performance divergence. When mid-cap and smaller large-cap stocks outperform mega-cap leaders — which occurs cyclically in US market history — the equal-weight approach delivers superior returns compared to traditional market-cap-weighted alternatives. The Invesco equal-weight ETF essentially provides built-in mean reversion, automatically rebalancing against concentration risk.

Performance Potential and Risk Considerations

The equal-weight strategy tends to perform with solid growth rates over extended periods, while technically carrying lower concentration risk. Its counterintuitive strength emerges precisely when conventional wisdom fails — when market leadership rotates away from the dominant five stocks.

That said, traditional market-cap weighting isn’t without merit. It captures momentum in thriving companies and requires less rebalancing. The choice depends on your conviction about future market dynamics and your tolerance for owning less of what’s currently winning.

Building Your US Investment Strategy

For investors evaluating how to allocate capital in US equities, this comparison matters. A thoughtful approach might involve understanding both philosophies rather than defaulting to whatever carries the biggest brand name or lowest expense ratio. Each ETF reflects different assumptions about market efficiency and mean reversion — assumptions worth examining before committing long-term capital.

The $1,000 you invest today matters less than the framework guiding your decision.