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Investors poured record amounts into funds that spread their assets evenly across the S&P 500 amid growing concerns that Wall Street profits had become overly dependent on a few technology giants.
The Invesco S&P 500 Equal Weight Exchange Traded Fund attracted about $14.4 billion in the second half of 2024 as investors hedged their advantage in big technology stocks, according to Morningstar data.
The surge brings the fund’s total annual inflows to $17 billion and comes after consecutive years of the fund underperforming the S&P. Analysts say this highlights investors’ concerns about being overshadowed by the Magnificent Seven’s tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. said.
According to S&P Dow Jones Indices, S&P stock prices rose 24% last year, and these seven companies accounted for about half of the index’s gains. The equal weight index rose only 11% as quarterly rebalancing favored low-growth stocks.
“The biggest focus for investors these days is concentration risk and concerns that the market is too upside-heavy,” said Manish Kabra, head of U.S. equity strategy at Société Générale. said. He expects the company to post double-digit profit growth this year, outpacing the biggest tech companies.
“If that happens, we don’t have to be so defensive,” he said, adding, “So many people I meet point out that the equal-weighted index was up 11% last year, and there’s no need to be too defensive.” “They say it makes more sense to invest,” he added. than expecting a return of 20+ [from the market-cap weighted S&P 500] Every year. “
The Invesco Fund rebalances each quarter by selling top S&P stocks and buying laggards, giving each holding an equal percentage of the fund’s assets. This approach was beneficial in 2022, as the largest index constituents bore the brunt of that year’s selloff.
Despite its poor performance, the fund has amassed more than $72 billion, ranking 25th among U.S. ETFs by total assets, according to Morningstar. That number surpassed the ETF’s all-time high of flows of about $12.8 billion in 2023, according to Morningstar.
Investors are also turning to derivatives such as CME Group’s S&P 500 index futures to bet against the S&P while hedging against a sell-off in tech stocks. The contract, which started in February, has averaged open interest of 16,500 contracts this month, worth about $2.4 billion.
Paul Woolman, CME’s global head of equity products, said interest in the deal spiked when Magnificent Seven’s stock price plunged in July and August. “I think it has woken up some more clients to how to manage that risk and what strategies should be in place.”
Alessio de Longis, head of investments at Invesco Solutions, the multi-asset arm of the $1.8 trillion fund manager, said of the overall trend: “This is not just market participants tracking performance; “This reflects a desire to diversify into cheaper assets.” I’m interested in equal weighting.
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But using funds that are tailored to give equal weight to each company may not be the best way to avoid market concentration concerns, said Brian Armor, director of passive strategies research at Morningstar. Ta.
“Incorporating fundamentals into the evaluation of each company will serve investors better than arbitrarily giving all companies the same weight,” Armor said. “At least that would better reflect the identity of the market.”
Rick de los Reyes, portfolio manager at T. Rowe Price, said the change in sentiment could help sectors such as energy, metals, mining and other industrial stocks. “There’s excitement in the marginalized parts of the market, and some think we’re finally starting to see some strength,” he said.
