The S&P 500 is too tech-heavy. This alternative ETF keeps beating it.

Philip van Doorn

Different stock indexing and weighting schemes will be seen at different times, but some approaches are designed to withstand market cycles

Investors love index funds for a reason. They allow for easy diversification and are usually characterized by low costs. For patient investors, broad-based index funds can outperform most actively managed funds because they are more expensive to manage and because it is so difficult to consistently select portfolios that outperform the indexes.

But with the S&P 500 SPX returning 36.4% over the past year through September 30, investor warnings tend to focus on two themes.

The first is valuation. The index is trading at a forward price-to-earnings ratio of 21.6, based on Monday’s closing prices and weighted consensus earnings per share estimates of analysts surveyed by FactSet. That’s an increase from its forward P/E ratio of 18 a year ago and well above its 10-year average forward P/E ratio of 18.3, according to data provided by FactSet.

The second warning concerns the concentration of the US large-cap benchmark index. The S&P 500 is market capitalization weighted. On Monday, the SPDR S&P 500 ETF Trust SPY portfolio, the oldest and largest exchange-traded fund tracking the index, was allocated 20% to three companies: Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Nvidia Corp (NVDA). Here are the top five holdings, which made up 26% of the portfolio:

   Company               Ticker   % of SPY portfolio  One-year total return through Sept. 30 
   Apple Inc.             AAPL                  7.3%                                     37% 
   Microsoft Corp.        MSFT                  6.6%                                     37% 
   Nvidia Corp.           NVDA                  6.1%                                    179% 
   Amazon.com Inc.        AMZN                  3.6%                                     47% 
   Meta Platforms Inc.    META                  2.6%                                     91% 
                                                                             Source: FactSet

SPY was founded in January 1993 and has $591 billion in assets under management.

All total returns listed in this article include reinvested dividends and are net of expenses.

Weighting the S&P 500 by market capitalization rewards success, but it can also lead to index fund investors concentrating more of their money in a few stocks than they might imagine.

Different weighting and selection within the S&P 500

One obvious way to counter a cap-weighted index is to allocate evenly. Because stock prices change daily, the RSP Invesco S&P 500 Equal Weight ETF Index is rebalanced quarterly. Equal weighting leads to a greater value tilt because the tech giants at the top of the index, with so much sales growth for a company like Nvidia, all carry equal weight, even for companies that are growing at a snail’s pace. This ensures variable performance. For example, in 2022, when SPY fell 18.2%, RSP only fell 11.6%. However, when SPY returned in 2023 with a return of 26.2%, RSP increased by 13.7%.

Invesco has several other alternative weighting methods to the S&P 500 and factor-based strategies to track indices selected from within the index.

To compare long-term performance, we limited the list to Invesco S&P 500 Factor ETFs that were launched more than five years ago. In addition to comparing the ETFs’ ratio performance with SPY, we compared them to the Vanguard S&P 500 ETF VOO, which was launched in September 2010 and has $509 billion in assets under management. SPY’s annual expense is 0.0945% of average assets under management, while VOO’s expense ratio is 0.05%.

The tables below compare the performance of SPY, VOO and nine Invesco factor funds that have been around for over five years. The first table shows the total returns and the second table shows the average annual returns.

At the top of each table are the two broad S&P 500 index funds. Next on the list is the Invesco S&P 500 Quality ETF because it is the only ratio ETF that has been around for over 15 years. The list is then sorted by five years of returns.

Each bold number for an ETF ratio means that its return for that period was higher than SPY and VOO.

First, total returns:

   ETF                                                  1-year return  3-year return  5-year return  10-year return  15-year return 
   SPDR S&P 500 ETF Trust                                       36.0%          39.8%         109.0%          247.7%            618% 
   Vanguard S&P 500 ETF                                         36.3%          40.1%         109.4%          249.8%             N/A 
   Invesco S&P 500 Quality ETF                                  36.2%          45.1%         117.3%          269.7%            710% 
   Invesco S&P 500 Momentum ETF                                 59.1%          56.4%         138.4%             N/A             N/A 
   Invesco S&P 500 GARP ETF                                     16.4%          24.9%          97.3%          267.1%             N/A 
   Invesco S&P 500 Revenue ETF                                  27.5%          41.4%          98.3%          204.3%            557% 
   Invesco S&P 500 Equal Weight ETF                             28.5%          25.8%          81.1%          180.4%            514% 
   Invesco S&P 500 Pure Growth ETF                              30.9%           4.4%          71.3%          170.7%            587% 
   Invesco S&P 500 Low Volatility ETF                           24.8%          25.9%          37.9%          154.8%             N/A 
   Invesco S&P 500 High Dividend Low Volatility ETF             34.4%          34.8%          46.8%          146.3%             N/A 
   Invesco S&P 500 Pure Value ETF                               23.7%          25.9%          54.8%          110.9%            422% 
                                                                                                                    Source: FactSet

And now the average annual return:

   ETF                                                  1-year return  3-year avg. return  5-year avg. return  10-year avg. return  15-year avg. return 
   SPDR S&P 500 ETF Trust                                       36.0%               11.8%               15.9%                13.3%                14.0% 
   Vanguard S&P 500 ETF                                         36.3%               11.9%               15.9%                13.3%                  N/A 
   Invesco S&P 500 Quality ETF                                  36.2%               13.2%               16.8%                14.0%                15.0% 
   Invesco S&P 500 Momentum ETF                                 59.1%               16.1%               19.0%                  N/A                  N/A 
   Invesco S&P 500 GARP ETF                                     16.4%                7.7%               14.6%                13.9%                  N/A 
   Invesco S&P 500 Revenue ETF                                  27.5%               12.3%               14.7%                11.8%                13.4% 
   Invesco S&P 500 Equal Weight ETF                             28.5%                7.9%               12.6%                10.9%                12.9% 
   Invesco S&P 500 Pure Growth ETF                              30.9%                1.5%               11.4%                10.5%                13.7% 
   Invesco S&P 500 Low Volatility ETF                           24.8%                8.0%                6.6%                 9.8%                  N/A 
   Invesco S&P 500 High Dividend Low Volatility ETF             34.4%               10.5%                8.0%                 9.4%                  N/A 
   Invesco S&P 500 Pure Value ETF                               23.7%                8.0%                9.1%                 7.7%                11.6% 
                                                                                                                                        Source: FactSet

It’s no surprise that VOO slightly beat SPY over all periods going back to 10 years due to VOO’s lower expenses.

Over the entire 15-year period, the Invesco S&P 500 Quality ETF SPHQ fund performed best. It has beaten SPY in all time periods on the charts and has beaten VOO in all time periods except for the one-year period ending September 30. SPHQ has 100 S&P 500 stocks that rank top on a quality score that includes returns on equity, debt to book value, and the “accruals ratio” of operating assets to total assets. The indices of all these ETFs are maintained by S&P Dow Jones Indices. The index tracked by this fund is rebalanced twice a year, with other adjustments made immediately after a company is spun off or removed from the S&P 500. Each stock is weighted by its quality score and market capitalization. SPHQ has earned a five-star rating (the highest rating) in Morningstar’s US Blend Large Fund category. The expense ratio is 0.15%.

Another notable outperformer among S&P 500 ETFs was the Invesco S&P 500 Momentum ETF SPMO, which was launched in October 2015. It outperformed SPY and VOO over the one-, three- and five-year periods through September 30. the fund currently holds 99 shares of companies with the highest “dynamic performance”. Twice a year, the components of the S&P 500 Index are ranked by how much their prices have increased over the past 12 months and then rated for volatility. The portfolio is composed of the top 20% of S&P 500 stocks, which are then weighted based on a combination of momentum and market capitalization. The fund also earns a five-star rating from Morningstar in the “US Fund Large Growth” category from the investment information provider. It has an expense ratio of 0.13%.

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