VOO vs. RSP: If AI Stocks Get Too Concentrated, Here's Which One I'd Choose

For the past few years, megacap technology stocks have experienced substantial growth due to AI excitement. This has led to a high degree of concentration among the top-performing companies within the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500 using a market-cap-weighted method. Consequently, if the index becomes overly concentrated at the top, I would opt for the Invesco S&P 500 Equal Weight ETF (RSP), which equally distributes its holdings among the 500 stocks it tracks.

In 2009, a similar signal emerged for Nvidia, a smaller chipmaker previously overlooked. Recently, that same "Total Conviction" signal has reappeared for a company one-hundredth the size of Nvidia. The current Vanguard S&P 500 ETF predominantly tracks tech-related stocks with significant AI investments. Eight of its ten largest holdings are in this sector, with Nvidia accounting for 7.6% of the index.

VOO's strong returns over the past decade, exceeding 15% annually, can be attributed to its high allocation to fast-growing AI stocks. However, the index's top-ten weighting has doubled over the past decade, surpassing its dot-com bubble peak. In contrast, the Invesco S&P 500 Equal Weight ETF exhibits much lower overall concentration, with its top ten holdings comprising only 3% of its assets, and its largest holding, Moderna, representing just 0.6%.

The disparity in concentration levels is crucial. Should one of Moderna's shares experience a significant decline, its impact on RSP would be minimal. On the other hand, if Nvidia or another large holding in VOO were to plummet, it could substantially affect the ETF's performance. Despite my belief in VOO's merits, if its top holdings were to grow excessively large (over 50%), I would consider purchasing RSP instead for a passive S&P 500 investment.

While VOO remains an excellent choice, it may not generate the same level of upside potential as RSP. However, this trade-off could offer downside protection in anticipation of an AI stock correction. Before investing in the Vanguard S&P 500 ETF, it is essential to note that the Motley Fool Stock Advisor analysts have recently identified 10 stocks they deem the best for investors to buy now.

The ten stocks in this list could yield significant returns in the coming years, as demonstrated by their performance during previous recommendations.