Fear the FAANG stocks? Here’s a better S&P 500 index fund for you

The 20% decline in Facebook’s stock Thursday after disappointing second-quarter results underscores how sensitive investors can be to bad news for a high-flying tech company.

Investors in S&P 500 Index funds suffered collateral damage, as they did last week when Netflix’s shares tumbled after the video-streaming company failed to hit its own subscriber target.

The FAANG group of companies — Facebook FB, -0.78% Amazon AMZN, +0.51% AAPL, -1.66% AAPL, -1.66%  Apple AAPL, -1.66% Netflix NFLX, -2.17%  and Google holding company Alphabet GOOG, -2.35% GOOGL, -2.54%  — together had a market value of $3.37 trillion as of July 25. That incredible number represented 14% of the S&P 500 Index’s SPX, -0.66% total market capitalization, according to FactSet.

So what? Those giant companies’ valuations reflect their success. But they also represent a considerable risk for the typical index-fund investor because the S&P 500 and the index funds that track it are weighted by market capitalization.

But there is a different index approach that provides just as much diversification while limiting the risk of taking a brutal hit in one area of the market: equal-weighted index funds.

One example is the Invesco S&P 500 Equal Weight ETF RSP, -0.59% As its name implies, this ETF holds the S&P 500 companies in equal proportions. The ETF has a four-star rating (out of five) from fund-research firm Morningstar and has an annual expense ratio of only 0.20%. Here’s how its performance has measured up over the past 10 years against the market-cap weighted SPDR S&P 500 ETF SPY, -0.68% net of expenses:

FactSet

That’s remarkable outperformance for the equal-weighted ETF, especially when you consider how successful the FAANG group has been.

Let’s dig deeper into performance comparisons for more periods, this time also including the S&P 500 Index itself:

	Total return - 2018 through July 25	Total return - 2017	Average return - 3 years	Average return - 5 years	Average return - 10 years	Average return - 15 years
Invesco S&P 500 Equal Weight ETF RSP, -0.59%	1.7%	18.5%	11.5%	11.9%	11.6%	10.5%
SPDR S&P 500 ETF SPY, -0.68%	2.5%	21.7%	13.2%	13.2%	10.8%	9.4%
S&P 500 Index SPX, -0.66%	2.7%	21.7%	13.4%	13.3%	10.9%	9.5%
Source: Morningstar

So the market-cap-weighted SPDR S&P 500 ETF and the benchmark index have outperformed the Invesco S&P 500 Equal Weight ETF over the past five years, which have been wonderful years for Big Tech. But when you go out longer — 10 or 15 years — the lower-risk ETF shines.

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