An equal-weighted index as an alternative to Tesla's addition to the S&P 500

Tesla is joining the S&P 500. This is not new information, but the question is what investors should do about it. There is the primary effect of adding a new stock that will be the sixth largest to the index and will represent 1% of the index. If you use the benchmark, you will have to have Tesla. All passive investors are now betting on Tesla.

The folks at Irrelevant Investor produced a chart that shows the six largest stocks in the SPX index will equal the capitalization of the smallest 369 stocks in the index. The majority of the index seems of little consequence. 

There are ways to take advantage or protect against this high concentration in just a few stocks which have been momentum leaders. The simplest is to reweigh the S&P 500 index through buying an equal-weighted basket or a non-cap-weighted index. This equal-weighted index has outperformed the cap-weighted index significantly over the last three months. This plays on the themes of a broad recovery given vaccines, the renewed focus on smaller cap names and value. 

This is not the only way to play the concentrated index problem, but it is a simple cheap alternative. Another approach is use overlays of focused protection through a collar on the top six names in the index. Investor should not feel hostage to a cap-weighted index.