A Middle Ground ETF Solution to S&P 500 Overconcentration

There iis a recurring theme of artificial intelligence (AI) powering the S&P 500 with names like Nvidia at the top of the heap. Investors may be wondering if there’s a way to mitigate concentration risk, but still get quality at the same time. There is using exchange traded funds (ETFs) like the Invesco S&P MidCap Quality ETF (XMHQ).

That inherent risk is evident when looking at the top holdings of the S&P 500. Nvidia comprises about 5% of the the S&P, surrounded by other “Magnificent Seven” names like Microsoft and Apple—both of which comprise the top two holdings in the index.

The “Magnificent Seven” are lauded for propelling the index to higher heights this year. Still, investors are wondering if that AI party could be coming to a halt. The start of the second quarter is a reminder that volatility can strike at any time and sell-offs in the S&P’s top constituents can sway the index profoundly.

“Some investors might be afraid the S&P 500 is trading too high because its forward price-to-earnings ratio (its market capitalization divided by weighted rolling consensus profit estimates for the following 12 months) has increased to 20.9 from 18.3 over the past year,” a Yahoo Finance report said. “The index’s weighted price has increased more quickly than expected profits have increased.”

If investors are hesitant to allocate to large cap names to capture growth, they may want to consider midcap names. Midcap equities can strike a balance between the stability of large cap equities and the growth of small cap equities.

Add Quality to Mid Cap Exposure

One fund to consider is the Invesco S&P MidCap Quality ETF (XMHQ). The fund does not cast a stone into the deep pool of midcap names available. Instead, it finds names that can capture upside when markets trend higher and withstand volatility in a downtrend.

Per its baseline fund description, XMHQ seeks to track the investment results of the S&P MidCap 400® Quality Index. The Index is a modified market capitalization weighted index that holds approximately 80 securities in the S&P Midcap 400® Index that have the highest quality scores, which are computed based on a composite of three proprietary factors.

“The $4.6 billion Invesco S&P MidCap Quality ETF XMHQ appears to be a solid alternative for investors who think the S&P 500 SPX is overvalued,” the report said further, also noting that investors may be harboring hesitance in the S&P 500 given its strong rally stemming from late 2023.

For more news and information, visit the Innovative ETFs Channel.