Get Your SPEX on

One of the harder things for an investor to do right now is to hedge or insulate themselves from the influence of AI, data centre capex, and technology.

In fact, I spent quite a bit of time at the weekend looking at ways to do that, but none seemed satisfactory.

Then I thought, rather than avoiding the tech cluster of the S&P 500, which has, after all, delivered a +773.0% price gain in the last 10 years, could we dilute its influence? 

The most obvious way to do this is to look at an equal-weight strategy in the S&P 500 index, which these days is the global touchstone for equities. 

Let's just unpack that

The S&P 500 index is weighted by market capitalisation, which means that the bigger a stock's market cap grows, the more influence, or impact it has on the index it's a member of.

That hasn't been too much of an issue until relatively recently. 

However, the advent of the trillion-dollar company changed that, and we are now in a situation where 5 stocks in the Information Technology sector have market caps of > $1.0 trillion. 3 of these are larger than $3.0 trillion; add in Meta Platforms and Alphabet from Comms Services, the latter of which has a market cap of $4.10 trillion, and you start to see the issue. 

Wider Issue

This issue does not just affect US indices; it's also spread further afield; for example, in the MSCI All Cap Weighted World Index or ACWI, US stocks now account for 63.0% of the weighting; indeed, Nvidia accounts for almost 5.0% of the ACWI on its own.

These stocks are literally the elephants in the room, larger than many countries and crowding out thousands of other stocks in the ACWI. There are 2400 stocks in that index, but most of the time only 5 or 10 get heard; it's even more concentrated in the S&P, which has 500 constituents but often disregards 490 of them.

However, by calculating an equally weighted version of the index, that bias is largely removed, because in an equal-weight index; all stocks are treated equally, and not some more equally than others.

There are several equal-weighted US equity-focused ETFs available to UK retail traders and investors. 

But I have gone with the Invesco SP 500 Equal Weight UCITS ETF (Accumulation units), which trades under the ticker SPEX LN 

Performance 

The concept of an equal-weight version of the S&P 500 index dates back to 2003; the SPEX ETF was established on April 6 2021, so we have just 5 years of performance data for the ETF.

However, we can use the S&P 500 equal-weight index as a close proxy. 

Looking at S&P Dow Jones own data over 10 years, the equal-weight index has returned an annualised +10.08% per annum, while the S&P 500 cap-weighted index has generated an annualised 13.66% in each of those 10 years. 

Over 3 years, the numbers are EW +13.20% CW +19.50%; over 1 year it’s +12.93% vs 16.24%. Zoom in to the year-to-date, however, they are basically neck and neck.

Of course, the idea of owning the EW version of the index is not to outperform but rather to dial down the noise of the Magnificent 7 and their close compatriots.

As of the end of last week 301 S&P 500 stocks were up on the year to date though only 202 of those were outperforming the cap weighted index. In an equal-weight version of the index, those stocks should be more visible.

Of course, the time when holding the more egalitarian version of the index should come into its own is in a downturn, particularly one that’s led by big tech. 

However, even by holding an ETF that aims to mirror the EW index, you won't avoid big tech entirely; indeed, Information Technology still makes up +14.70% of the index under this calculation method, but that is counterbalanced by both the Financial and Industrial sectors.

Overall Rating 3.50 out of 5.0

Pros: offers an alternative take on US equity index investing, SPEX avoids the cap weighted bias and dominance of one or two sectors in the traditional index. And provides a more realistic overview of the performance of large-cap US stocks.

Cons: SPEX won’t ever capture US exceptionalism as expressed by the Mag 7 and leading Chip stocks. SPEX is prone to tracking error above its annual cost base which could be down to infrequent rebalancing. The ETF is priced in US dollars and UK holders are therefore exposed to currency risk. 

Technical outlook

Right now SPEX is testing at horizontal support circa 5400 following a bearish crossover between its 10 and 50-day moving averages; a break here might take us back to 5316 with 5280/75 below that. 

If it were to test back to 5180, that might make an interesting entry point. 

However at the time of writing, 5400 is holding and the gap up at 5485 want’s filling.

Rating 4.0/5.0

Fundamental outlook

The S&P 500 is in rude health; it's trading on a forward P/E ratio of 19.1 times this below its 5-year average and only a smidgen above the 10-year mean, having just delivered a blended Q2 EPS growth rate of approximately 50.0%.

Analysts are looking for EPS growth of +25.0% or greater in Q3 2026 which would go along way to delivering an estimated growth of +28.70% for 2026 as a whole.

Sustainability is another question of course. However, growth is widespread, with Industrials, Energy and Financials all expected to continue to do well. Net profit margins in the S&P 500 are forecast to come in just below +15.0% in Q3 26 and this despite a confusing macroeconomic and geopolitical background 

Rating 4.0/5.0