Advisors use equal-weight ETFs and options to limit mega-cap risk

Financial advisers, planners and portfolio managers are reallocating domestic large-cap exposure into equal-weight ETFs, factor-based funds and options overlays following a Morningstar study linking rising index concentration to large AI-related capital expenditures by top technology firms. Market-cap weighted benchmarks have concentrated more weight in a few mega-cap stocks as those firms expanded capital spending on AI infrastructure.

Advisers are using equal-weight methodologies to reduce reliance on the biggest names in cap-weighted indexes. The Invesco S&P 500 Equal Weight ETF (RSP) resets each of the 500 components to a 0.2% allocation quarterly; that approach reduced technology exposure to about 19% versus more than 37% in the cap-weighted S&P 500 as of June 5. The ALPS Equal Sector Weight ETF (EQL) assigns equal weight across all 11 sectors and had just over 11% allocated to technology as of June 5.

Some advisers are adding factor-based ETFs to reorient core sleeves away from the largest growth names. The VictoryShares Free Cash Flow ETF (VFLO) screens for large-cap companies with high free cash flow yields and growth prospects; the fund had no exposure to the Magnificent Seven mega-cap technology group. The iShares MSCI USA Min Vol Factor ETF (USMV) selects low-price-beta stocks, increasing weight in utilities and consumer staples and reducing exposure to technology, consumer discretionary and communication services relative to the broad benchmark.

To generate income and provide downside buffers, advisers are layering option-income strategies and defined-outcome collars on equity exposure. The NEOS Nasdaq 100 Hedged Equity ETF (QQQI) combines long Nasdaq 100 exposure with a systematic call-writing program that produces monthly distributions aimed at offsetting declines in the underlying equities. The Innovator Equity Managed Floor ETF (SFLR) embeds an institutional options collar designed to create a protective floor against severe market drops.

Portfolio consultants describe these tools as ways to maintain broad large-cap exposure while limiting single-stock and sector concentration through rules-based reweighting, factor selection and option overlays. Equal-weight and sector-equal constructions change sector footprints by design; factor funds apply accounting or volatility screens that exclude or underweight the largest technology names; options overlays add explicit income and defined downside parameters.

Index licensing and provider relationships are disclosed for certain funds. VettaFi LLC is the index provider for VFLO and EQL and receives an index licensing fee; VFLO and EQL are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi does not bear responsibility for their issuance, administration, marketing or trading.

Background: concentration risk has increased as a small group of mega-cap technology companies grew larger market capitalizations following sizable AI capital expenditures. Market-cap weighted indexes allocate more to the largest firms, prompting advisers to use equal-weight constructions, factor exposures or option-based protections to redistribute weight, adjust sector exposure and set downside limits.