Let’s reconsider the Dow Jones indexes. While they have a rich history, they come with some drawbacks. Firstly, they track only a small number of companies—30 for the Dow Industrials and 20 for the Transports. Moreover, they are sector-focused rather than providing a comprehensive view of the entire market.
Another issue lies in their price-weighted methodology, where the influence of a company on the index is determined by its stock price. This can lead to distortions, particularly with factors like stock splits.
Given these limitations, it might be worthwhile to explore alternative ETFs that offer a broader and more diversified exposure to the market.
A magnificent alternative way to index
In contrast to traditional indexing methods, the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) offers a distinct approach to investing, making it an attractive option for accessing a diversified portfolio with a single purchase. This ETF starts by including approximately 500 stocks from the S&P 500 index, and then it allocates an equal portion to each of these companies.
The S&P 500 index covers roughly 80% of the total market capitalization of US stocks, providing broad market exposure. However, the Invesco S&P 500 Equal Weight ETF takes diversification a step further by ensuring each constituent has an equal weight in the portfolio.
Traditional S&P 500 index-tracking ETFs typically employ market capitalization-based weighting, which results in larger companies having a greater influence on the ETF’s holdings. While this approach helps match the index’s performance, it can limit diversification. For instance, the top 10 companies in the index often account for over one-third of its total value.
In contrast, the Invesco S&P 500 Equal Weight ETF maintains a more balanced allocation, with its top 10 investments representing approximately 2.5% of the fund’s total value. While this may lead to slight deviations from the S&P 500 index’s performance, it offers investors greater diversification benefits.
Over the past decade, the Invesco S&P 500 Equal Weight ETF has delivered annualized returns of around 10%. Although slightly trailing a traditional S&P 500 index fund during this period, it remains a solid option for investors seeking exposure to a wide range of leading US companies.
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Investing offers incredible potential for building wealth over time, primarily due to the power of compounding. The longer you invest, the greater the opportunity to grow a substantial nest egg. Starting early allows you to harness the full potential of compounding and maximize your returns over time.
Today is the perfect time to evaluate whether the Invesco S&P 500 Equal Weight ETF belongs in your investment portfolio. By laying a strong foundation for your investments now, you’ll appreciate the benefits of starting sooner rather than later.
