MW Think the S&P 500 is too expensive? Check out these ETFs instead.

By Philip van Doorn

Some investors are worried that the stock market is set up for a tech-driven decline

Walmart has generated more revenue than any U.S. company over the past four reported fiscal quarters, but it makes up only 0.76% of the SPDR S&P 500 ETF. An indexing approach that weights the S&P 500 by revenue rather than market capitalization has outperformed over the past five years.

Amid the flurry of warnings about the stock market being overvalued, it might help to learn about indexing approaches that can lower your concentration risk while still allowing you to ride along with the most successful companies.

Broad index funds are typically weighted by market capitalization as they track indexes such as the S&P 500 SPX. The advantage of this approach is the low cost and diversification. A disadvantage is that the high concentration in a handful of stocks can set you up for greater declines during periods of weakness for the broad market. An investor can easily be temped to sell into a declining market rather than being patient and waiting for a recovery. This can lead to an all-too-common pattern of moving to cash to sit on the sidelines, and then returning well after a recovery has started. This can reduce the long-term performance of your portfolio.

An expensive market

The S&P 500 is trading close to its highest trailing price/sales ratio ever. But there are conflicting opinions about how risky the market is right now.

-- Why do so many investors think the stock market is forming a bubble?

-- AI stocks are in a bubble. Why are so many investors refusing to believe it?

-- It's not an AI bubble. It's a longer-term bull market, says this Wall St firm.

We cannot predict when the broad market will pull back significantly. It happens almost every year, and all declines have been followed by recoveries. Of course, you never know how long a period of decline or recovery will last.

It is worth pointing out that the S&P 500 fell 12% from April 2, the day President Donald Trump made his initial "liberation day" tariff announcements, through April 8. And the index was down nearly 19% through April 8 from its previous high on Feb. 19. The S&P 500 recovered quickly, and through Tuesday it had returned 10.9% for 2025. All investment returns in this article include reinvested dividends and for funds are net of expenses.

Lower risk with a different weighting approach for the S&P 500

If you are especially worried about tech-stock valuations, look back to 2022, when the S&P 500 declined 18.1% and its information technology sector fell 28.2%.

It turns out that an indexing approach that weights stocks by the companies' revenue and not by market capitalization held up better during that down year, setting up an impressive five-year chart:

The Invesco S&P 500 Revenue ETF returned 109.6% for five years through Aug. 26, compared with a 99.4% return for the SPDR S&P 500 ETF Trust.

The SPDR S&P 500 ETF Trust SPY has $629 billion in assets under management and tracks the S&P 500 by holding all of its stocks weighted by market capitalization. The exchange-traded fund's annual expenses total 0.0945% of assets under management, which means the annual fee for a $10,000 investment would be $9.45.

The Invesco S&P 500 Revenue ETF RWL has $6.1 billion in assets under management and is rated five stars (the highest rating) within Morningstar's U.S. Fund Large Value category. It also holds all the stocks in the S&P 500, but the stocks are weighted by the companies' past four quarters' revenue as a percentage of the S&P 500 companies' combined revenue. There is a maximum weighting of 5% for any stock held by the fund. The portfolio is updated for changes in the S&P 500 and rebalanced quarterly, based on the latest available revenue information. This fund was established in 2008. Its annual expense ratio is 0.39%.

During 2022, when SPY pulled back 18.2%, RWL was down 6%.

The S&P 500 is so concentrated that SPY's top three holdings - Nvidia Corp. (NVDA), Microsoft Corp. $(MSFT)$ and Apple Inc. $(AAPL)$ - make up 21.1% of the exchange-traded fund's portfolio.

For RWL, the largest three holdings - Amazon.com Inc. (AMZN), Walmart Inc. $(WMT)$ and Apple - make up 9.9% of the portfolio.

Walmart is a fascinating example. This company makes up 3.65% of the RWL portfolio. And when the ETF's portfolio is next rebalanced, Walmart might take the top spot, because its revenue for the past four reported quarters has totaled $693.15 billion, exceeding Amazon's revenue of $670 billion.

Despite being the best revenue generator in the U.S., Walmart makes up only 0.76% of the SPY portfolio. Other stark examples of the different weightings for the funds include Tesla Inc. $(TSLA)$, which makes up 1.79% of the SPY portfolio but only 0.55% of the RWL portfolio, and Palantir Technologies Inc. (PLTR), which makes up 0.62% of the SPY portfolio but only 0.02% of the RWL portfolio.

One additional comparison is that the Magnificent Seven group of stocks - Nvidia, Microsoft, Apple, Amazon, Meta Platforms Inc. (META), two share classes of Alphabet Inc. $(GOOGL)$ $(GOOG)$ and Tesla - make up a combined 33.79% of the SPY portfolio but only 12.45% of the RWL portfolio.

During an interview with MarketWatch, Nick Kalivas, Invesco's head of factor and core strategy for exchange-traded funds, described RWL as having "a value tilt, with still the whole S&P 500, as opposed to a narrow slice" that you would have with ETFs that track value indexes. In other words, this is still a strategy that rewards growth, but with less concentration. It can even be considered to be a better investment in the growth of the U.S. economy and the cap-weighted approach when considering the Walmart example.

Competing funds

When looking at ETFs competing with RWL, the best performers, according to FactSet, include two more Invesco funds and three managed by other firms:

-- The Invesco RAFI U.S. 1000 ETF PRF tracks an index of stocks selected and weighted for "fundamental strength" according to four factors: book value, cash flow, sales and dividends. This fund was established in 2005 and its expense ratio is 0.33%. It holds close to 1,100 stocks.

-- The Invesco RAFI Strategic U.S. ETF IUS was established in September 2018. It was described by Kalivas as adding a "rewarding quality overlay" to the RAFI strategy, to hold 548 stocks. This fund's expense ratio is 0.19%.

-- The Schwab Fundamental U.S. Large Company ETF FNDX narrows down large-cap U.S. companies by screening and then weighting by scores based on revenue, cash flow, share buybacks and dividends. The fund holds 741 stocks. It was established in 2013 and has an expense ratio of 0.25%.

-- The First Trust Rising Dividend Achievers ETF RDVY was established in 2014 and has an expense ratio of 0.48%. It holds 76 stocks of companies to track the Nasdaq U.S. Rising Dividend Achievers Index. Component stocks have a strong history of increasing dividend payouts and have also passed a screen based on earnings growth, cash-to-debt ratios and dividend payout ratios. The fund uses a modified equal-weight strategy, as one-fourth of the portfolio is reconstituted and rebalanced each quarter.

-- The JPMorgan U.S. Quality Factor ETF JQUA was established in 2017. It holds 274 stocks as it selects from the 1,000 largest publicly traded U.S. companies and ranks and scores them for what the fund's prospectus describes as "profitability, quality of earnings, and solvency." The fund's weightings are based on the quality scores, adjusted to match the sector weighting of the Russell 1000 Index RUI.

All of the ETFs mentioned in this article have five-star ratings from Morningstar, with the exception of PRF and JQUA, which have four-star ratings.

Before investing in any fund, you should look at its portfolio, the fund manager's fact sheet and the prospectus to learn more about how the fund is managed.

One way to begin your research is to click on the tickers for more information.

Read: Tomi Kilgore's detailed guide to the information available on the MarketWatch quote page

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-Philip van Doorn

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August 27, 2025 11:13 ET (15:13 GMT)

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