Stock prices have changed dramatically within a few months. The biggest risk didn’t happen

Long-term investors who follow one simple piece of advice tend to benefit. Do nothing but stay the course as the market twists and turns. but, S&P500 Today’s bull market and the bull market of the past decade are unique in that they are led by a small number of high-ranking tech stocks with little historical precedent.

One of the “somethings” investors have been advised by experts to consider is moving to an equal-weight S&P 500 fund to reduce the risk of having such a high level of exposure in a single trade. Well, things didn’t go as expected in 2026.

So what did investors who took the equal-weight approach gain? To date, it has fallen an additional year behind the standard market-weighted S&P 500 in performance. September was the toughest month for the weight, with the index falling more than 4%, ending its longest multi-week losing streak since 2022.

To be clear, investors are not losing money by the same weight, but they are making less money than investors who stick to the standard S&P 500.

The index’s gains have been highly concentrated in recent weeks, with the S&P 500 setting new highs even though more of the 500 stocks that make up the benchmark have set new lows than individual highs. A recent analysis from Goldman Sachs found that market breadth, a technical term used to describe how many stocks across an index contribute to profits, has fallen to its lowest level since the dot-com bubble. Meanwhile, going back to the beginning of 2024, a recent analysis from Kobeissi Letter found that a basket of 42 AI stocks generated 67% of the S&P 500’s price return.

This week’s analysis from Datatrek Research found that the equal-weighted S&P 500 index has “consistently lagged its market-capitalization weighted counterpart over a one-year holding period for almost four years. Moreover, the gap is even larger and has lasted longer than at any point in more than 20 years.”

But that leaves the market-cap-weighted S&P “significantly overweight” the tech sector, meaning a comparable weight remains at least a “partial alternative” to addressing the risk, the paper wrote.

The technology concentration in the S&P 500 is not going away. Tech stocks now make up about 16% of the similarly weighted S&P 500 index, compared with still nearly 40% of the standard index. And now, suddenly, it’s tech stocks that are once again looking like the most volatile stocks on the market, and perhaps not entirely unrelated to the recent rally.

Don’t abandon the concept of equal weight investing

Equal weights still provide a potential response, but the right way to think about it might be to remove the idea that it’s an either-or choice.

“The answer is not just holding equally weighted ETFs,” said Todd Rosenbluth, head of research and editorial at TMX VettaFi.

Rather, he says, you should combine cap-weighted ETFs and equal-weight options in your portfolio. This means allocating to ETFs like Vanguard in terms of market weight. VOO or State Street Investment Management. Spime — A big winner this year thanks to its ultra-low expense ratio, which beat iShares’ profits. IVVand its assets ballooned by more than $50 billion after becoming the default Trump account investment.

On the equal weight side, that could mean allocating to an ETF like Invesco’s Equal Weight S&P 500 fund. RSPeach holding an equal amount of 500 shares, but the weights may change between quarterly rebalancing periods. Alternatively, investors can take an equal weight approach at the sector level using ETFs like the ALPS Equal Weight Sector ETF, Rosenbluth says. EQLcan serve the same purpose of reducing market concentration in technology stocks.

He says recent poor performance at his weight is no reason to abandon the concept. In fact, with tech stocks soaring again, it’s time to rethink how you employ this concept.

“The recent strength of cap-weighted ETFs is yet another sign that investors are putting too few eggs in one basket,” he said. “If you’re a long-term investor concerned about the market being driven by a small number of stocks, there are alternatives to consider.”

Over the past five days, Equal Weight has once again outperformed, albeit over an incredibly short period of time, with defensive sectors such as consumer staples leading the market, up nearly 5% this week, its biggest gain since February.

Some experts reject the idea of ​​equal weighting, arguing that if investors want to institute a strategy that reflects this approach, they can invest in mid-cap funds in addition to their core S&P 500 holdings. Rosenbluth said investors can try to balance out the top S&P 500 by adding mid-cap funds to iShares’ core mid-cap portfolio. IJH This is an example.

He added: “These companies provide exposure to a variety of companies with both growth and stability characteristics. However, these companies are not large-cap companies, so you are adding a variety of companies to your portfolio for potential diversification benefits.”

Todd Thorne, chief ETF strategist at Baird Strategas, said investors need to keep their eyes open in a market where Nvidia is bigger than the entire consumer discretionary sector of the S&P 500. For him, the message to take home is to “surround the core of your portfolio with ‘low-tech, low-correlation’ alternatives.”

He said looking at active management approaches to the “SMID cap” segment of the market, or stocks that bridge the gap between small and mid-cap stocks, will be the way to manage risk going forward. Or at least split the allocation between passive and active SMIDs, he adds.

But Song added that diversifying away from S&P 500 risk in this environment could also mean thinking about sectors such as natural resources and energy, from metals and mine names to underlying commodities. “Real assets are a diversifier in this environment,” he said.

And in bonds, recently bond yield While some experts suggest the worst of the spike in yields may be over (the reason may have to do with a more skeptical outlook for the economy and stock market), Song recommends sticking with high-quality, short-term investment-grade bonds.

Thorne said that while there are moments when S&P equal weighting works, in the past it has been more of an “easy button” to push, and is now not equivalent to trying to lock in the core of an AI-heavy portfolio.

According to DataTrek research, the equal-weighted S&P went from outperforming the market-cap weighted index (by an average of 3.2 percentage points) over the 10-year period from 2004 to 2014 to underperforming it (by an average of -2.8 percentage points) since 2015. The global financial crisis and the underweight of the equal weight index of financial stocks contributed significantly.

But since the beginning of this decade, the only times the company has outperformed are in 2021, at the height of the speculative stock bubble, and in 2022, when tech stocks were particularly hard hit relative to the rest of the market.

“From mid-2023 to the present, Equal Weight has consistently underperformed in nearly every one-year holding period, making it the longest rough period since at least 2004,” DataTrek said in its analysis.

What do investors conclude?

DataTrek says it’s up to investors. This could also be determined to be “no longer a valid investment approach in a world that concentrates profitability growth, and therefore equity value, in a relatively small number of businesses, primarily related to AI.”

Or, “The market has overestimated the value of the world’s largest technology companies, and liquidation is near. The experience from 2008 to 2018 lends credence to the second argument. Technology companies’ long history of structurally outperforming through continuous reinvention and disruptive innovation supports the first.”

At the end of the day, Datatrek says investors are lucky to have an ETF that can perform both approaches. “We do not view these two versions as competitors, but rather useful partners in portfolio construction,” the magazine said.