The S&P 500 ETF might not be what you think it is...

0:00 Now, if your friend asked you how the stock market is doing this year, you'd probably do what most people would do. You pull up your brokerage app, you search for the ticker SPY or VOO, and check out the S&P 500. And right now, the performance number looks pretty uninspiring. It's basically flat for the year. But of course, we are still at the start, so who knows what's going to happen in the upcoming three quarters. But what most people don't realize is that the number is only telling you half the story. Because there's actually another ETF out there tracking the exact same 500 companies. And it's actually up 5% year-to-date. So the difference between the flat and 5% comes down to one thing. How the index is being constructed here. So one is market cap weighted, which is what most people are familiar with, and the other is actually equally weighted, and it trades under the ticker RSP. So the question now is, what's actually going on under the hood here? And is this just some quirky 2026 anomaly, or is it actually telling us something much bigger about where the market is heading, and how you should be thinking about your portfolio today?

1:13 Regardless, smashing the like button is the norm here. So make sure you are done with that first. To understand why these two funds are performing so differently, we need to first take a step back and look at how each of them is actually being built here. So when you actually talk about the usual ticker like a spy or the VOO, you're actually buying into something called the market weighted index. So what that means is that the bigger the company is, the more your money goes into it. And right now, a single dollar that you put into the spy sends roughly 30 cents straight into just seven companies alone. Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet, and Tesla. And in other words, just these seven companies alone make up roughly 30% of the index today. Henceforth, 30 cents out of the dollar. And is that considered a high or even low percentage? I think it's all relative.

2:18 But if you were to look at this chart and follow the blue line here, over the past decade at least, just 15 years ago, this same seven stocks that we talked about made up actually only 6% of the index. So, from 6 to 30%, I think that's a pretty huge distance. However, to be fair, such a market cap weighted index tends to be quite top-heavy. And this research from Yardeni actually tracks the top five company names and their weightage in the S&P 500 index. And roughly 15 years ago, the top five names were not all your tech names, but they also included companies like Exxon Mobil, which is an oil company, and Walmart, your discount and supermarket store. Which at that point in time made up roughly 15% of the index. Whereas in today's climate, the top five makes up roughly 25 to 30%. So, RSP on the other hand works completely differently on a completely different logic. Every single company in the index actually gets an equal slice. And if you just do a rough estimation, 1 / 500 means that there's a roughly 0.2% allocation each. And the fund actually rebalances back to that equal split after every quarter. And the key point for now is that with RSP, you are genuinely exposed to all 500 US companies in a meaningful way, rather than just riding on the coattails of a handful of mega tech names. Now, if you enjoy this kind of content, we put out weekly investment insights through Investing Bytes, where we break down real-world examples and give you clear thinking frameworks straight into your inbox. So, it's completely free, and the sign-up link is in the description below. Now, back to the video. Neither approach is inherently better or worse, and that's actually one of the most important things to understand going into this video. So, they are simply just different bets on how the market is going to behave. And right now, in 2026, it's quite clear that one of the bets is paying off more than the other, which raises the question of why and whether that's likely to continue. So, first things first, how did we actually get here? Because this level of concentration, at least in the S&P 500, clearly didn't happen overnight. And if you look at that chart again, you'll probably kind of notice a pattern that always starts the same way. First, you'll see a compelling narrative emerge. A small group of companies start to capture the imagination of market participants. Capital starts to flow in, and the weight of this group of stocks will start to balloon. It happened with the Nifty 50, it happened with the dot-com boom, and this time around, I think the narrative is clearly around artificial intelligence, or AI for short. So, from around 2021 onwards, the group of Magnificent Seven became the most owned trade. And 2022, after the GPT moment, essentially catalyzed the entire idea of going all in into tech.

5:17 And that justified for a while. In 2024 alone, I think those seven companies were up 65% while the median stock in the S&P actually rose less than 4%. So, if you were just looking at the headline index number, looking at how the S&P 500 has fared, everything looks still pretty great. But underneath that headline, nearly half of the US stocks actually finished the year in negative territory. And the index was essentially just a mask over a much more uneven market. And in 2026, I think the pendulum started to swing the other side. And that's clearly the setup we're walking into today, where the gap between what the index tells you and what's actually happening beneath the surface is wider than it's been in a very long time. Which then brings us to the natural question of whether that gap is starting to close and what it means if it actually does.

6:11 Now, let's take a look at the numbers side by side here because this is where the story um starts to get a tad bit more interesting and also a little more complicated than most people actually expect. So, if to pull up the full history of the RSP going back to its launch in 2003, what you'll notice immediately is that the relationship between uh equal weighted index and the general market weighted index like the SPY, they tend to move in cycles and those cycles actually map almost perfectly onto the broader market regime we were just talking about. And for the first decade of RSP's existence, roughly from 2003 through to around 2014, equal weighted index was genuinely the better bet in most years. Coming out from the dot-com wreckage, um broader market participation actually drove RSP up meaningfully ahead. Then again, after the financial crisis in the 2009-2010, RSP also came roaring back up returning 44% in 2009 compared to SPY's 28%. And some of you might think that it's a freak incident, but clearly the data shows otherwise. It's not just that year alone, but in almost every subsequent year since then, RSP had outperformed the general SPY. And the natural question is, what's the main driver? So, when the market actually recovers broadly, especially from such a steep sell-off like the 2000 dot-com or 2008 GFC, and for the more curious bunch, the main driver of this recovery is especially so when the market has experienced some sort of a significant sell-off, and they recover much more broadly. Smaller companies tend to recover much quicker, and this equal weightage will allow them to shine. But then, something actually changed from around 2015 onwards, and especially so from 2017 through 2024, the spy actually pulled decisively ahead as the group of mag nificent seven era actually start to take front and center attention. And over the past 5 years alone, the SPY has clocked roughly 78% returns, whereas RSP only delivered 48%. And yet, here we are in 2026, and the picture is shifting again. Year-to-date, as we have shared previously, RSP has outperformed SPY by more than 500 basis points, or 5%. So, the question now for investors is whether the cycle is genuinely turning back to the RSP, or whether the magnificent seven is simply just taking a breather, resting, and they can reassert themselves again after the recovery. Now, let's try to look at both sides of the argument. So, the bull case for the SPY and the mag seven continuing to dominate is still actually pretty compelling. The current consensus, at least for the long-term earnings growth rate for the mag seven, is still well over 20%. Not only that, they also enjoy world-class profit margins, and it's well over the double of the typical S&P 500 company. And in the short-term at least, the tech sector is also not slowing down anytime soon. And to be frank, think about it. If they're the ones driving the most amount of growth, it's also natural for them to be weighted the heaviest, too. Why not reward somebody for outperforming? And in fact, at the current 30% allocation, while still contributing more than 30% of the expected growth, it isn't necessarily very unreasonable to expect that. And if AI genuinely delivers the productivity transformation, then we can probably guess that the companies best positioned to capture that are almost certainly sitting inside the Mac 7 names. On the flip side, however, although the Mac 7 had fared spectacularly in the last 5 years, profits for the Mac 7 are expected to grow around 18% in this year alone. And it's the slowest pace actually since 2022. And not dramatically better than the 13% projected growth for the other 493 companies. So, the key here is the gap itself. So, when the earnings growth gap between the top seven and everyone else actually start to narrow, I think the valuation premium naturally also become much harder to defend.

10:25 Henceforth, we are seeing some sort of a rotation. And looking at the first 2 months of 2026, I believe that most market participants are also trying to price that in from the rotation of the top seven into the rest of the 493. Henceforth why when we look at the index, it's basically flat, but this group of stocks have actually been suffering. And they're down close to 5-6% on a year-to-date basis. And the ultimate question is, where does this leave us? And the honest answer is, I think both case have certain levels of merit. And the outcome over the next decade probably depends less on whether these are great businesses, but more on whether the earnings growth can keep pace with these stretched valuations.

11:07 And now, the question for us as investors isn't really, "Oh, should I switch everything out to RSP tomorrow instead because they seem like a better deal?" I think that's too simplistic. And honestly, the data that we just looked at should make you much more cautious about making such a dramatic rotation based on the few months of outperformance. But I think the more useful question here is whether your current portfolio allocation reflects a genuine view about the world or whether it's just a default outcome of buying the most popular index without really thinking about what's inside it or not.

11:41 And today, if you own SPY or you own VOO, and you're comfortable with the fact that you're running a rather concentrated bet on a handful of tech companies continuing to grow in dominance, then that's perfectly fine. But here's the thing, and this is probably the most important point in this entire video. Whether you land on the SPY, RSP, or some combination of both, the single biggest mistake you can make is to keep second-guessing yourself every time a new narrative comes along.

12:10 And there will always be a new narrative. There was one back in 2020 when the pandemic was going to upend markets as we know them. There was one in 2022 because there was a rising inflation concern, and there were concerns about a stagflation in the US markets. And the rate hikes are going to crash everything. There was one at the start of 2025 when President Trump was upending the world order as we know it. And trust me, there will be another new narrative coming in the next six, next 12, or next 24 months. Who knows? And it will probably sound just as convincing and just as urgent. And the ones who consistently build wealth over long periods of times are not the ones who made the smartest tactical call at every turning point. And based on our real experiences, they're usually the ones who picked a strategy, committed to it, and stayed invested through all the noise. Because the real cost of constantly reacting to market narratives isn't just the bad trades that you make.

13:10 It's the time you spend sitting on the sidelines second-guessing yourself. And as the cliché goes, missing even a handful of the best few trading days in a given decade can cut your long-term returns by close to half. And those days almost always come when news is at the most frightening, and its temptation to stay out is always at the strongest. And if you want to keep building on the kind of framework we talked about today, we have a weekly newsletter called Investing Bytes where we break down real-world case studies. And if you've stuck around until the end of this video, I have a feeling it's exactly your kind of thing. So, hit the link in the description below and we'll send the latest issue straight to your inbox. And this is CK from Piranha Profits signing off. Till next time, keep winning.