Broad market exposure at lower valuations and less concentration

It’s no surprise that market returns have been outstanding the last two years. Many investors were enthusiastic about the growth prospects of artificial intelligence and other secular investment themes and they rushed into the related stocks. That helped drive the more than 25% back-back S&P 500 Index returns in 2023 and 2024. While some of it’s from fundamentals and improving earnings growth, valuation expansion was a notable tailwind. In fact, it accounted for more than half of the 2024 S&P 500 return. It’s forward price-to-earnings ratio increased 13% throughout the year from 22.1 to 24.9 but estimated forward earnings only increased by 9.5%. So, investors were paying $25 for every $1 of earnings. That’s a steep price to pay for future earnings. For the past 10 years, the average was approximately 20 times future earnings.

Overlaying the revenue and forward earnings contribution of the top 10 S&P 500 companies with their weight illustrates this phenomenon. The right hand side of the graph shows that investors have been assigning much greater weight to the top 10 stocks than they’re actually contributing from a fundamental standpoint.  So, they’re paying more for a narrow exposure that’s increasingly reliant on a small group of companies continuing to outperform.

A solution? An alternative weighting strategy that ties a company’s weight to a fundamental metric like revenue. This can help align with its true economic footprint, and also reduce concentration.

RWL, the Invesco S&P 500 Revenue ETF invests in all 500 stocks in the S&P 500. Instead of assigning weights based on market cap, it weights holdings based on their proportional revenue contribution, subject to a 5% single stock cap at each rebalance.  Revenue weighting can be a simple effective tool to get broad market exposure at lower valuations and with less concentration. For example, the forward price-to-earnings ratio of RWL at year-end was 15.4 (vs. 24.9 for the S&P 500 Index), and the top 10 companies accounted for 23.09% of RWL (versus 38.8% for the S&P 500 Index.). In tilting toward companies with lower valuations, or more value exposure, RWL’s revenue weighting may also be well-positioned if a resilient labor market and easing financial conditions help glide the US economy toward a soft landing in 2025.

Get more information about RWL and our complete guide to our 2025 ETF investing ideas for a soft landing below this video.

Important Information

All data from Bloomberg as of 12/31/2024 unless otherwise stated.

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