The S&P 500 has enjoyed another respectable year of gains, now up just north of 15% year to date despite the bout of November volatility. As you’d imagine, the Magnificent Seven have once again contributed more than their fair share to the appreciation in the major index. And while the wind continues to be at their back as they continue to embrace AI tailwinds, some index investors might be growing concerned over the concentration risks in the name and the potential fallout that could happen if an AI bubble were to end up causing a vicious crash with the tech companies at ground zero.
Though the latest relief rally has caused many sighs of relief, it is quite notable that the bounce-back saw some broad strength across the board, with non-Mag Seven companies enjoying impressive up days. While tech was a strong sector fuelling the recovery, other sectors also stepped up in a big way.
Is there an opportunity to go equal-weight with the S&P 500?
With the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP), one of the most popular equal-weighted ETFs on the market, rising close to 1.5%, while the S&P gained 0.9% and the Mag Seven-heavier Nasdaq 100 rose less than 0.4%, it’s clear that market breadth might be the name of the game going into 2026, especially if investors stay more critical of the big AI spenders until they can finally deliver those profitability numbers to soothe the growing AI valuation concerns.
As the AI trade becomes viewed as a major source of risk, I do think it makes sense to consider a more equal-weighted basket of stocks, if not for a less choppy ride as AI stocks wobble, perhaps as a play on greater rewards come the great broadening out of the market rally. Over the past full year, the equal-weighted S&P 500 has done nearly nothing, gaining a measly 1%.
The AI trade could get wobblier. A broader ETF might be a solution to avoid the hard impact of an AI bubble bust
As the benefits from AI investments begin to spread beyond the tech sector, I think there’s not only compelling value to be had with the other 493 stocks in the S&P 500, but perhaps more relative strength as the AI trade runs over some roadbumps en route to a potential roadblock.
For investors, the big question is which companies will benefit from AI without having to spend money hand over fist. For indexers, I think the answer is as easy as simply betting on an equal-weighted S&P ETF, a value-oriented fund with less Mag Seven exposure, or even the Dow Jones Industrial Average, even though many would consider the group of 30 stocks to be a terrible investment that’s not quite representative of the broad market.
Either way, the weightings make sense, as does the diversification that’s provided. At the end of the day, a relative heaviness in some of the market’s lesser-appreciated value names might be the way to go if the rumbles from November lead investors to pursue more of a value tilt with their portfolios.
Reducing the weight of the Mag Seven has never been easier
For investors who have more than their fair share of Mag Seven exposure, a name like the Defiance Large Cap ex-Mag 7 ETF (NASDAQ:XMAG) might make even more sense than reaching for the Dow 30. The ETF, as its name suggests, is pretty much the S&P 500 minus the Mag Seven companies. Indeed, it’s as though you’re getting the S&P 500 had the group of seven powerful tech titans never existed!
As the Mag Seven continues marching higher or if they suddenly become a drag on the market, as the S&P 493 begins to do more heavy lifting, I’d look for such an ETF to gain in popularity. As magnificent as the Mag Seven is, I think there’s a good chance that a lot of investors are overexposed to the names via the S&P 500 or Nasdaq 100.
With ETFs that go out of their way to exclude or reduce the Mag Seven’s exposure, I think there’s a quick and simple way to broaden your portfolio so that it can become more diversified and better able to fare if we are dealt an AI crash at some point, perhaps one that’s more severe than the November one we just experienced.