Equal-Weight S&P 500 Funds Surge 16%: The Secret to Outperforming the Market
Source: Fortune. Casualplayhub News adds summary, context, and editorial framing while linking back to the original report.
If you have a piece of your portfolio parked in a standard S&P 500 index fund, you are likely feeling good about the 12% return you have racked up this year. But there is a less flashy corner of the indexing world that has quietly left that performance in the dust. The Invesco S&P 500 Equal Weight ETF (RSP) treats Nvidia, a mid-cap industrial stock, and every other company in the index as equals. That approach has delivered a year-to-date return of 15.95% through August 26, versus the 12.37% posted by the iShares Core S&P 500 ETF (IVV). The gap of nearly 3.6 percentage points has put equal weighting back in the spotlight and pushed RSP to a milestone: on August 19, the fund crossed $100 billion in assets under management for the first time, after pulling in more than $12 billion in net inflows just this year.
The structural difference between the two fund types explains the divergence. A market-cap-weighted fund like IVV gives its largest constituents—Nvidia, Microsoft, Apple, and Amazon—outsized influence because they represent a huge share of the index. RSP, by contrast, assigns each of the 500 companies roughly the same weight at each quarterly rebalance, muting the impact of any single giant. That nuance matters a great deal in 2026, according to Brendan McCann, a senior associate manager research analyst at Morningstar. He points to the underperformance of several big-name tech stocks as the key swing factor. "Several of the big names in the market, like Microsoft, Nvidia, and Apple, have underperformed the broader technology market," McCann explained. "Since RSP underweights those companies, its performance is more insulated when those stocks underperform."
The flip side of the coin has also reinforced the trend. Many smaller S&P 500 stocks have performed exceptionally well in 2026, and equal weighting gives those names more room to drive returns. "Several smaller S&P 500 stocks have performed exceptionally in 2026, and equal weighting gives those stocks more weight," McCann said. So RSP is not just avoiding tech's laggards—it is capturing upside from smaller companies that a cap-weighted fund would barely register.
This milestone naturally raises the question of whether the equal-weight trade has become too popular for its own good. McCann is not worried yet. "I think at $100 billion the ETF still has plenty of runway," he said. However, he flagged a very real constraint tied to fund size: liquidity in RSP's smallest holdings. As the fund's assets grow, it becomes harder to trade the smallest stocks in the portfolio. "There's no perfect number for how large the assets could grow, but I would say if assets were to quadruple, it could be more challenging to rebalance the portfolio," McCann noted. That would put the potential stress point near $400 billion.
McCann sees the current performance gap as a live snapshot of just how much the S&P 500 now depends on a handful of giant stocks. The primary driver, especially given the concentration in today's market, is the performance of the largest stocks relative to the broader market. Because so many of those largest stocks sit in one sector, technology's fortunes disproportionately steer the cap-weighted index's returns. The numbers illustrate how lopsided that concentration has become. As of August 25, the S&P 500 Equal Weight Index held roughly 17% in technology, versus a 38% technology weighting in the standard S&P 500 Index—a gap of about 21 percentage points, according to McCann. The cap-weighted benchmark tracked by most index funds and 401(k) target-date funds is, in effect, a leveraged bet on one sector.
The implication cuts both ways. "Should the technology sector take a hit, RSP should hold up better than the broader market," McCann said, which is a defensive case for equal weighting. But it also means RSP's fortunes will keep hinging on tech's next move: a rebound in Nvidia, Microsoft, or Apple could just as easily narrow the performance gap that has fueled this year's inflows.
Article commentary
The surge of equal-weight S&P 500 funds like the Invesco RSP ETF reflects a broader shift in market dynamics. As the cap-weighted S&P 500 becomes increasingly concentrated in a handful of mega-cap tech stocks, investors are waking up to the risks of that lopsided exposure. The 21 percentage-point gap in technology weighting between the standard and equal-weight indices is staggering. It means that a standard index fund is essentially a heavyweight bet on the tech sector, leaving portfolios vulnerable to a downturn in that single industry. The equal-weight approach offers a simple yet powerful diversification tool: by treating every company equally, it reduces sector concentration and amplifies the impact of smaller, often overlooked stocks that can deliver strong returns. This year's performance has been a textbook case in point. While Nvidia, Microsoft, and Apple have stumbled relative to the broader tech market, smaller S&P 500 names have thrived. The equal-weight fund captured that upside while sidestepping the drag from the mega-cap laggards. The result is a compelling narrative that has attracted $12 billion in inflows and pushed assets to $100 billion. But the question on every investor's mind is whether this trend has legs or if it is a short-term anomaly. The answer likely hinges on the future trajectory of tech stocks. If the mega-cap names rebound strongly, the performance gap between cap-weighted and equal-weight funds could narrow or even reverse. That would test the staying power of the recent inflows. On the other hand, if tech continues to face headwinds—whether from regulatory pressure, valuation concerns, or shifting market leadership—the equal-weight approach could maintain its edge. The defensive case McCann highlights is valid: equal-weight funds are structurally less exposed to a tech correction. Yet the liquidity concern is a real, if distant, risk. As the RSP ETF grows, its ability to rebalance efficiently may diminish, especially when dealing with the smallest S&P 500 stocks. The $400 billion threshold McCann mentions is a rough guide, but it underscores that passive investing at scale has its limits. For now, the fund appears to have ample room to grow, but investors should be aware that the very popularity of the strategy could eventually erode its advantages. From a broader perspective, the rise of equal-weight funds is a healthy development for markets. It challenges the dominance of cap-weighted indexing, which can create feedback loops that inflate the largest stocks and distort capital allocation. Equal-weighting offers a more democratic approach, giving smaller companies a voice in portfolio returns. However, it is not a panacea. Equal-weight funds tend to have higher turnover, higher fees, and more exposure to smaller, less liquid stocks. They also lack the natural momentum tilt that cap-weighting provides—when a stock is rising, it automatically gets a larger weight in a cap-weighted fund, which can amplify gains. For financial advisors and individual investors, the choice between cap-weighted and equal-weight S&P 500 funds should be based on time horizon, risk tolerance, and views on market concentration. The equal-weight strategy is a tactical tool, not a permanent replacement for core holdings. The recent outperformance is a reminder that diversification is not just about owning many stocks, but about how those stocks are weighted. As the market continues to evolve, the debate between these two indexing philosophies will only grow louder.