The 20% decline in Facebook’s stock Thursday after disappointing second-quarter results underscores how sensitive investors can be to bad news for a high-flying tech company.
Investors in S&P 500 Index funds suffered collateral damage, as they did last week when Netflix’s shares tumbled after the video-streaming company failed to hit its own subscriber target.
The FAANG group of companies — Facebook FB, -18.46% Amazon AMZN, -1.90% AAPL, +0.05% AAPL, +0.05% Apple AAPL, +0.05% Netflix NFLX, +0.55% and Google holding company Alphabet GOOG, +0.16% GOOGL, +0.28% — together had a market value of $3.37 trillion as of July 25. That incredible number represented 14% of the S&P 500 Index’s SPX, -0.12% total market capitalization, according to FactSet.
So what? Those giant companies’ valuations reflect their success. But they also represent a considerable risk for the typical index-fund investor because the S&P 500 and the index funds that track it are weighted by market capitalization.
But there is a different index approach that provides just as much diversification while limiting the risk of taking a brutal hit in one area of the market: equal-weighted index funds.
One example is the Invesco S&P 500 Equal Weight ETF RSP, +0.43% As its name implies, this ETF holds the S&P 500 companies in equal proportions. The ETF has a four-star rating (out of five) from fund-research firm Morningstar and has an annual expense ratio of only 0.20%. Here’s how its performance has measured up over the past 10 years against the market-cap weighted SPDR S&P 500 ETF SPY, -0.08% net of expenses:
That’s remarkable outperformance for the equal-weighted ETF, especially when you consider how successful the FAANG group has been.
Let’s dig deeper into performance comparisons for more periods, this time also including the S&P 500 Index itself:
Total return - 2018 through July 25 Total return - 2017 Average return - 3 years Average return - 5 years Average return - 10 years Average return - 15 years Invesco S&P 500 Equal Weight ETF RSP, +0.43% 1.7% 18.5% 11.5% 11.9% 11.6% 10.5% SPDR S&P 500 ETF SPY, -0.08% 2.5% 21.7% 13.2% 13.2% 10.8% 9.4% S&P 500 Index SPX, -0.12% 2.7% 21.7% 13.4% 13.3% 10.9% 9.5% Source: MorningstarSo the market-cap-weighted SPDR S&P 500 ETF and the benchmark index have outperformed the Invesco S&P 500 Equal Weight ETF over the past five years, which have been wonderful years for Big Tech. But when you go out longer — 10 or 15 years — the lower-risk ETF shines.
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