Are you looking for some index funds to buy for 2020 and beyond? If so, it’s important you know that the S&P 500 is top-heavy. By this, I mean that big names like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) account for 19.8% of the index’s total weight.
That means that the remaining 499 stocks account for 80.2% of the index’s total weight, an average of 0.16% per stock.
While the S&P 500 is often considered the creme-de-la-creme of large-cap index funds to buy — heck, even Warren Buffett pushes it — the reality is that it’s too darn concentrated in tech stocks.
“People risk buying into indexes that are top-heavy with these high-priced stocks,” Research Affiliates CIO Chris Brightman told Fortune recently. “We’ve seen these patterns before, and they usually end in tears.”
The reality is that you can avoid this problem by considering equal-weighted index funds. Here are the seven to buy for 2020 and beyond:
- Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP)
- SPDR Technology ETF (NYSEARCA:XNTK)
- First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT)
- Amplify Online Retail ETF (NASDAQ:IBUY)
- iShares MSCI USA Equal Weighted ETF (NYSEARCA:EUSA)
- ALPS Equal Sector Weight ETF (NYSEARCA:EQL)
- Virtus Real Asset Income ETF (NYSEARCA:VRAI)
Let’s take a deeper look at what makes each of these exchange-traded funds worth buying.
Index Funds to Buy: Invesco S&P 500 Equal Weight ETF (RSP)
Expense Ratio: 0.2%, or $20 per $10,000 invested
If you’re going to consider equal-weighted index funds to buy, it makes sense to start with the equal-weighted version of the S&P 500.
The largest exchange-traded index fund listed in the U.S. is the SPDR S&P 500 ETF (NYSEARCA:SPY), with $283.8 billion in total assets. It’s market-cap-weighted with the same holdings as the S&P 500 Index.
Since April 2003, the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) has provided investors with an equal-weighted version of the S&P 500. This means that all 505 stocks are rebalanced quarterly back to their initial weighting of 0.198%.
So, at the time of writing this, the top stock in the SPY is Microsoft, with a weighting of 5.38%. The top holding in the RSP by weighting is a tie between two energy companies: Halliburton (NYSE:HAL) and Apache (NYSE:APA) at 0.32%.
Where is Microsoft? It has a weighting of 0.18%, which means it has declined slightly since the last rebalancing on April 24. This year’s quarterly rebalance was delayed from the scheduled date of March 20 due to chaos in the markets at that time.
Unfortunately, for Invesco, it failed to rebalance the $5.9 billion mutual fund version on April 24, forcing it to have to repay $105 million to it and another S&P 500 equal-weighted mutual fund.
SPDR NYSE Technology ETF (XNTK)
Expense Ratio: 0.35%
One of the issues with the SPY is that it gets clogged up with high-priced tech stocks like Microsoft and Apple, leaving passive investors with little else in the technology sector.
While the minimum market cap for inclusion is $2 billion, the weighted average market cap of the 35 holdings is $280 billion. Unlike the RSP, XNTK is rebalanced annually on the third Friday in December. Every one of the five top stocks in the RSP is held by the ETF, which has $380 million in assets under management.
By sector, the top three weightings are semiconductors (26.19%), internet and direct marketing retail (12.20%) and systems software (10.99%).
Because it only rebalances in December, you begin to see certain stocks take over the top 10 holdings. As of June 5, Tesla (NASDAQ:TSLA), Shopify (NYSE:SHOP) and JD.com (NASDAQ:JD) were the three-largest holdings with weights of 5.87%, 4.5% and 4.13%, respectively. Each of these stocks would have started last December, equally weighted at 2.86%.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
Expense Ratio: 0.55%
With the novel coronavirus being a big part of everyone’s lives in 2020, biotechnology stocks have become all the rage. Who wouldn’t want to own the next excellent biotech stock?
The First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) gives investors a passive portfolio of 30 biotech stocks participating in recombinant DNA technology, molecular biology, genetic engineering, monoclonal antibody-based technology, genomics and many other scientific areas.
Rebalanced four times a year on the third Friday in January, April, July and October, the $2.1-billion fund has been around since June 2006.
Since the latest rebalancing on April 17, Bluebird Bio (NASDAQ:BLUE) has jumped into the top position as I write this with a 3.95% weighting, up from 3.33% at the time of the rebalance. Likewise, 17 of the 30 have increased in value since the last rebalance. The next should be on July 17.
Since inception, FBT has averaged an annual return of 14.74% through March 31, almost double the S&P 500. If you can handle the volatility of biotech stocks, First Trust’s ETF is an excellent way to gain passive exposure to the biotech sector.
Amplify Online Retail (IBUY)
Expense Ratio: 0.65%
Morningstar currently gives the Amplify Online Retail ETF (NASDAQ:IBUY) a five-star rating among 42 consumer cyclical funds.
The ETF tracks the performance of the EQM Online Retail Index, which, as its name suggests, invests in companies that make money from online or virtual sales. During Covid-19, these companies have done well while traditional brick-and-mortar businesses have had to shut down.
If you like index funds that invest in stocks of varying market caps, IBUY might be for you. While large-cap stocks account for 59.4% of the fund’s $419 million in total assets, mid-caps account for another 22.0% and small caps represent the remaining 18.6%.
Since its inception in April 2016, IBUY’s annualized total return of 25.7% is almost double the S&P 500. Rebalanced twice a year in November and May, each stock starts with an equal weight of approximately 2.13%.
Since its rebalance in May, a significant number of its 47 stocks have jumped out to substantial gains, including Revolve (NYSE:RVLV), Stitch Fix (NASDAQ:SFIX) and Lyft (NASDAQ:LYFT), which have weights of 3.97%, 3.55%, and 3.40%, respectively as of June 8.
I would continue to expect IBUY to continue to perform better than most ETFs in the future as people continue to do more of their buying online.
iShares MSCI U.S.A. Equal Weighted ETF (EUSA)
Expense Ratio: 0.15%
Rather than invest in 505 of the largest companies in America, the iShares MSCI USA Equal Weighted ETF (NYSEARCA:EUSA) invests in 616 large- and mid-cap stocks. Not only that, but investors get a different index provider: MSCI Indexes versus S&P Dow Jones Indices.
If you only want large-cap stocks, EUSA is probably not for you. It has an average market cap of $22.1 billion compared to $349.7 billion for SPY. However, iShares’ ETF has a much lower valuation than SPY with a price-to-book and price-to-earnings 2.3 and 17.1, respectively, while SPY has a P/B and P/E of 3.4 and 24.2, respectively.
That’s what happens when you’ve got high-priced FAANG stocks accounting for almost 20% of your SPY portfolio. And it’s not even that much cheaper with expenses at 0.095% compared to 0.15% for EUSA.
Over the past five years, EUSA’s five-year annualized total return is 8.61%, compared to 11.4% for SPY. However, if you take out the performance of the FAANG stocks, the performance of the two index funds is very similar.
Two out of EUSA’s three top stock holdings are cruise lines: Royal Caribbean Cruises (NYSE:RCL) and Carnival (NYSE:CCL). Rebalanced quarterly, some of the stocks hurt in the first three months of the year have rebounded in the second quarter.
That’s the beauty of equal-weighted stocks.
ALPS Equal Sector Weight ETF (EQL)
Expense Ratio: 0.28%
The ALPS Equal Sector Weight ETF (NYSEARCA:EQL) tracks the performance of the NYSE Equal Sector Weight Index, which invests an equal amount in all 11 Select Sector SPDR ETFs. The index and ETF are rebalanced quarterly in March, June, September and December.
If you look at the sector breakdown of EQL as of June 8, the top three sectors are Energy (10.92%), Industrials (9.56%) and Financials (9.45%). Each of the sectors were rebalanced to 9.09% in March. They will be rebalanced again on the third Friday of June (June 19).
The smallest of the ETF holdings is the Health Care Select Sector SPDR ETF (NYSEARCA:XLV) at 8.16%.
EQL ensures that investors don’t miss out on a particular sector’s rally while also minimizing the exposure to any specific sector. For example, in 2015, the technology sector had the best performance of the 11 sectors, up 20.5%. A decade earlier, it was financials, which gained 21.3% in 2005.
As for overdoing a sector, the S&P 500 had a technology weighting of 25.48% at the end of March. Meanwhile, the Technology Select Sector SPDR ETF (NYSEARCA:XLK) had a weighting of 10.39%.
How has EQL performed compared to the S&P 500? Over the past five years, it had an annualized total return of 9.27%, 213 basis points less than SPY. But it’s still getting the job done without overdoing a given segment such as technology.
Virtus Real Asset Income ETF (VRAI)
Expense Ratio: 0.55%
As the name suggests, the Virtus Real Asset Income ETF (NYSEARCA:VRAI) provides passive exposure to real assets that have a history of producing income. It tracks the performance of the Indxx Real Asset Income Index, which invests in stocks in real asset categories, providing investors with an excellent alternative investment vehicle that generates consistent income and dividends.
The portfolio of 90, equal-weighted stocks is rebalanced quarterly, with the 30 top dividend growers selected from three real asset categories: infrastructure, real estate and natural resources.
As a result, you’ll notice that its top 10 holdings are much different than most equity portfolios. Further, the average market cap of the 90 holdings is just $5.44 billion, putting VRAI squarely in the mid-cap camp.
A little over a year old, the fall in energy prices has certainly hurt its performance out of the gate. Since its inception on Feb. 7, 2019, VRAI has generated a total loss of 14.95%, considerably lower than any of the other six ETFs based on index funds listed in this article.
While I’m not an energy fan, this portfolio is a good non-correlated option to the S&P 500 and other large-cap equity funds.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing, he did not hold a position in any of the aforementioned securities.