Concerned the Stock Market Is Too Concentrated in the "Magnificent Seven"? Buy This Invesco ETF Instead.

Over the long term, the benchmark S&P 500 index has generated average annualized returns of about 10%. However, during the past two years, it has more than doubled that, generating a total two-year return of about 53%, its best two-year stretch in the 21st century. One big reason for that was the artificial intelligence (AI) boom -- several companies that investors see as being best positioned to take advantage of this technology have soared to gigantic market caps.

However, while the returns those few companies have delivered have been great, the result is that eight stocks now account for roughly a third of the total value of the S&P 500. That may have some investors concerned about whether they're truly practicing diversification when they invest in an S&P 500 fund. If you're one of them, here's a way to ease your mind: Buy the Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSPT) instead.

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You don't have to buy the weighting system

The S&P 500 includes roughly 500 companies across every market sector. However, each stock's relative position in the index is weighted based on its market cap, which allows it to better reflect the value of the actual market. Recently, however, due to the success of high-flying tech and AI stocks, the weight of the S&P 500 has become overly concentrated in the Magnificent Seven stocks plus Broadcom (NASDAQ:AVGO) -- a group that a few pundits recently dubbed the "Fateful Eight". Here are each of their weightings in the S&P 500 as of Jan. 1:

• Apple (NASDAQ:AAPL): 7.62%
• Nvidia (NASDAQ:NVDA): 6.74%
• Microsoft (NASDAQ:MSFT): 6.31%
• Amazon (NASDAQ:AMZN): 4.14%
• Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG): 4.05%
• Meta Platforms (NASDAQ:META): 2.58%
• Tesla (NASDAQ:TSLA): 2.33%
• Broadcom: 2.17%

That adds up to roughly 36% of the broader market. This is also after a 4% or so sell-off in the last few weeks of December. The concentration in the Fateful Eight could make your S&P 500 position vulnerable if there is a pullback, especially with most of these stocks trading at high valuations.

AAPL PE Ratio data by YCharts.

If you want to invest in the broader market but be less concentrated in the Fateful Eight, one alternative would the Invesco S&P 500 Equal Weight exchange-traded fund (ETF). Once a quarter, this ETF rebalances its portfolio so that it equally weights each of the stocks in the S&P 500. That significantly lowers concentration risk and results in more exposure to the relatively smaller large-cap companies in the S&P 500, and increases the positions of those that have underperformed. That's not always an advantage: The equal-weight S&P 500 ETF has significantly lagged the regular S&P 500 during the past two years.

RSP data by YCharts.

Less upside and less downside

Decisions about what funds you ought to invest in will depend heavily on your risk tolerance and your goals. Buying the equal-weighted S&P 500 ETF won't give you the same upside exposure to the big winners of the past few years, but it should limit your downside if members of the Fateful Eight experience big pullbacks. I think these stocks have a good deal of downside risk heading in 2025.

Of course, the gains in the S&P 500 could broaden, but that's far from certain. Treasury yields are still elevated right now, and there are potential catalysts that could send inflation higher again. Additionally, the Fateful Eight have become such a big part of the market that a sell-off that began in those few stocks could spill over into the broader market. Some analysts have also suggested that the Fateful Eight could turn into defensive plays in a tough market given their fortress balance sheets, strong market shares in their core businesses, and leads in technological innovation.

If you are a long-term investor, have at least a decade or two before retirement, and have no desire to pull funds out of your portfolio, there's no need for you to do anything other than brace yourself emotionally for some market volatility ahead. However, if you're looking to take some chips off the table after a fantastic run, invest new money in ways that are less exposed to the Fateful Eight, or invest on a shorter-term time horizon, then putting some funds into the Invesco S&P 500 Equal Weight ETF might make sense for you.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.