• Move over, SPY and VOO — the lesser-known equal-weight SPW is taking off, says Bank of America.
• The Mag Seven has carried the market-cap-weighted S&P 500 thus far, but that's about to change.
• Expect the rest of the market and the historically cheap SPW to receive a boost, some experts say.

When it comes to tracking the performance of the market's biggest companies, investors often think of the S&P 500 and the index funds that track it, like SPY or VOO. But there's another lesser-known S&P 500 index that you might not have heard of: the SPW.

SPW is an equal-weight index, which means that each index constituent has the same allocation in determining the index's total value. In contrast, the conventional S&P 500 allocates more weight to the biggest companies based on market capitalization. Thanks to this model, the meteoric rise of Nvidia and other Big Tech stocks this year has carried the rest of the market-cap-weighted index.

This means that the SPW hasn't notched the same gains as the SPX. But that's actually a feature, not a bug, of the index. In fact, with the SPW trading at a severe discount right now, investors should be adding it to their portfolio instead of the SPX, according to Bank of America.

That's because when Big Tech doesn't perform well, the top names disproportionately drag down the market-cap-weighted index. Plus, when top tech stock valuations soar, it puts the market at higher risk levels.

"Because a lot of the mega-cap tech stocks have gotten expensive, the overall market on a cap-weight basis appears expensive," Jack Ablin, chief investment officer at Cresset Capital, told Business Insider.

The rest of the S&P 500 outside the Magnificent Seven is starting to catch up.

The Magnificent Seven contributed over half of the index's earnings growth in Q2, but Wall Street analysts anticipate that the discrepancy will start closing in the coming quarters.

The rest of the index is performing better than it has in previous quarters, according to LPL Financial's Chief Equity Strategy Jeff Buchbinder. Healthcare and financials in particular have exhibited strong earnings growth. Bank of America's Head of Equity and Quant Strategy Savita Subramanian pointed out that the S&P 493 grew earnings this past quarter for the first time since 2022.

Buchbinder estimates that the earnings gap between the Magnificent Seven and the overall index will even out significantly in the next year, boosting the rest of the index. Steadying economic growth with slightly above-average inflation will boost revenues and margins. And as more companies implement AI in their business models, productivity enhancements will drive the bottom line, Buchbinder said in a recent note.

Impending rate cuts will also disproportionately benefit the other 493 names in the index, according to Ablin. Big Tech names carry very little debt on their balance sheets, meaning that they are less affected by elevated interest rates. Meanwhile, the rest of the index usually carries debt at levels of around four times EBITDA, or core business cash flow.

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As a result, higher-leverage sectors such as financials and real estate are set to benefit in coming quarters, Ablin said.

Tech names comprise roughly 30% of the cap-weighted S&P 500, but only around 10% of the equal-weighted index.

With the other 493 constituents of the index set to disproportionately benefit in the coming quarters, now is the ideal time for investors to increase allocations to the equal-weighted SPW, according to Bank of America.

If that wasn't enough reason, the SPW is trading at a two-decade low relative to the cap-weighted S&P 500, levels that haven't been seen since the dot-com bubble.

In contrast, the cap-weight S&P 500 is approaching overvalued territory. It's trading above historic averages on 19 out of 20 valuation metrics — including trailing and forward P/E ratios and sales and cash-flow multiples — according to an analysis by Bank of America.

For investors looking to diversify out of Big Tech overconcentration and capitalize on the improving fundamentals of the rest of the index, equal-weighted SPW funds may be an attractive option. Examples of SPW index funds include the Invesco S&P 500 Equal Weight ETF (RSP) and Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW).