Three Different Ways To Invest In The S&P 500 Demonstrate Mega-Cap Dominance

David Dierking

The S&P 500 and, by extension, large-cap tech have been the unquestioned market leaders. Even after last week's equity market declines and the current correction in tech stocks, large-caps are still in positive territory on the year.

The traditionally market cap-weighted S&P 500 is emphasizing the disparity between large-caps and smaller companies. The SPDR S&P 500 ETF (SPY) is up nearly 5% on the year, but various alternative weighting methods of the index have fared much worse.

The Invesco S&P 500 Equal Weight ETF (RSP) and Exponential's Reverse Cap Weighted U.S. Large Cap ETF (RVRS) give greater weights to the index's smaller components. In 2020, that has severely impacted their performances.

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The equal-weighted version trails the cap-weighted version of the S&P 500 by more than 9%. The reverse cap-weighted version, which gives almost no weight to the mega-cap FAAMG stocks, is underperforming by nearly 17%.

Clearly, this won't always be the case and when small-caps begin leading the market higher again, whenever that may be, we can expect a reversal of this trend.

The fact that small-caps continue to underperform despite being in the midst of the COVID economic recovery suggests that investors might not be buying into the strength of the bounce back. There's some data that is already confirming this and the fact that many retail locations and factories are still nowhere near pre-COVID levels indicates there's a long way yet to go. Throw in the idea that this has been an entirely Fed-fueled recovery and you can see why investors aren't fully getting back on board.

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