Looking for instant portfolio diversification? One way to get exposure to 500 different stocks across multiple market sectors is through SPDR S&P 500 ETF Trust (NYSEARCA:SPY) stock.
However, there’s a drawback with SPY stock you might not be aware of. I’d like to direct your attention to another exchange traded fund that deserves your consideration.
Sometimes, the best-known fund isn’t the right one for every situation. And you might even find that a less famous ETF is a better pick. So, keep an open mind as we delve into one ETF that’s time-tested, and another one that could actually be better in 2023.
The Major Problem With SPY Stock
Offered by State Street (NYSE:STT), SPY stock is historically significant because it’s actually the first ETF available to the public for trading. It’s been around since in January of 1993 and is the world’s largest ETF.
I’ll also informally call it the most popular ETF based on its heavy daily trading volume. The SPY ETF does a good job of tracking the price moves of the highly diversified, 500-member S&P 500 index.
SPY stock has an ultra-low expense ratio of 0.0945%. However, there’s a problem with the S&P 500, and therefore with the SPY ETF, in 2023.
The S&P 500 index is weighted by market capitalization, so big companies have more influence on the index than small ones. As I’ve explained previously, the S&P 500 and SPY stock are currently quite technology-heavy.
Thus, the SPY ETF has what might be called “concentration risk.” As Invesco (NYSE:IVZ) points out, the “top 10 companies in the S&P 500 make up over 30% of the index.” Consequently, “You may not be properly diversified as a result.”
Here’s a Better Alternative
Brought to you by Invesco, the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) offers a worthy alternative to the SPDR S&P 500 ETF Trust. It reduces concentration risk because it’s not weighted by market cap.
RSP stock equally weights the members of the S&P 500 index, and the fund is rebalanced on a quarterly basis.
That way, a handful of tech stocks like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) won’t have too much influence on the fund’s price moves.
And by the way, the RSP ETF has an expense ratio of 0.2%. That’s not as low as SPY stock’s expense ratio, I’ll admit. It’s still pretty low, though, and at least you’ll get more even and balanced exposure among the various stocks and sectors.
This year, the “Magnificent Seven” technology stocks have pulled the S&P 500 higher. However, maybe you’re concerned that these tech stocks are overpriced. I understand that concern, and therefore the Invesco S&P 500 Equal Weight ETF deserves your attention.
SPY Stock Is Fine, but Consider RSP Stock
A few months ago, Invesco celebrated the 20-year anniversary of the Invesco S&P 500 Equal Weight ETF. So, while RSP stock hasn’t been around as long as the SPY ETF, it’s still fairly well established.
SPY stock is perfectly fine if you don’t mind having heavy exposure to the “Magnificent Seven” technology stocks. You may be concerned about concentration risk this year.
Hence, it makes sense to buy RSP stock instead of the SPY ETF now. Later on, you can always re-allocate into SPY stock if mega-cap tech-company valuations decline.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
