MW The stock market is bouncing back. Here's a chance to fix your portfolio.

By Philip van Doorn

You might have been waiting for bounce to make a move. Don't be complacent.

Through Monday, the S&P 500 was down only slightly for 2025, showing how important it is for investors not to overreact to day-to-day events that cause alarming declines in the stock market. Now you have an opportunity to make changes to your investment portfolio.

Let's begin with a chart and then ask some questions about your thought process as an investor. Here is how the S&P 500 has performed this year through Monday. All investment returns in this article include reinvested dividends.

The S&P 500 SPX was down only slightly for 2025 through Monday. The large-cap U.S. benchmark index rallied 3.3% after Treasury Secretary Scott Bessent announced a preliminary deal between the U.S. and China to lower tariffs.

But through April 8, the index was down 15% for 2025, with the bulk of that decline following President Donald Trump's "liberation day" announcement of a slew of tariffs on April 2.

The stock and bond markets reflected investors' disapproval of a radical change to U.S. economic policy. And investors have rewarded the Trump administration's more recent moves to begin easing off on the tariffs.

During the worst of the stock market's decline in April, did you feel that maybe you had too much of your investment portfolio tied to the S&P 500? The index is highly concentrated, because it is weighted by market capitalization. The $597 billion SPDR S&P 500 ETF Trust SPY holds all the stocks in the index but is 36% concentrated in its top 10 holdings - actually 11 stocks, because it holds Alphabet Inc.'s Class A $(GOOGL)$ as well as Class C $(GOOG)$ shares. SPY's top three holdings - Microsoft Corp. $(MSFT)$, Apple Inc. $(AAPL)$ and Nvidia Corp. $(NVDA)$ - make up 18.9% of the portfolio.

Clearly the best move for someone invested in an S&P 500 index fund was to do nothing after Trump's disruptive tariff announcements, or even to keep adding money through regular contributions to a retirement account. The chart shows how ready the market was to reward any tempering of trade policy. And that provides a reminder: The stock market has gone through corrections (generally defined as declines of at least 10% from a recent high) and entered bear markets (20% declines) over and over, but it has always recovered. For 30 years through Monday, the S&P 500's average annual return was 10.4%, according to FactSet.

If you regretted having a large amount of your portfolio in an S&P 500 index fund and were worried, but you held out for the recovery, you no doubt feel relief. But now it is time to revisit your thinking about reallocating some of your portfolio.

This article by Paul Merriman illustrates how portfolio returns over the decades were affected by increased allocations to bonds. If you are a long-term investor building up a retirement nest egg, changing your asset mix can lower volatility without greatly lowering your long-term returns, at least according to the data Merriman analyzed going back to 1970.

Read: How high-yield bond funds like these can lower your investment risk

Getting back to stocks, which are still probably the best vehicle for the bulk of your portfolio if you are still going through a multidecade process of building your retirement account, there are less volatile approaches to indexing that keep you invested in large U.S. companies but reduce concentration risk.

If waiting through periods of higher volatility is too much of a mental burden, you might consider an index approach that is focused on stocks showing relatively low price volatility. The Invesco S&P 500 Low Volatility ETF SPLV holds the 100 stocks in the S&P 500 with the lowest price volatility over the previous 12 months at the times its portfolio is reconstituted, which happens four times a year, in February, May, August and November.

SPLV was up 4.5% for 2025 through May 12, while SPY was down 0.2%.

Nick Kalivas, Invesco's head of factor and core strategy for exchange-traded funds, called SPLV "a more conservative strategy to help people get better sleep at night," during an interview with MarketWatch. And so far this year, the low-volatility index approach as worked out very well. But for longer periods, the low-volatility approach might be too high a price to pay, based on performance figures below. SPLV is ranked three stars out of five within Morningstar's U.S. Fund Large Value category.

An index strategy focused on quality names in the S&P 500

A committed long-term investor who is a bit less worried about volatility but who still wants to lessen exposure to the largest components of the S&P 500 might consider the Invesco S&P 500 Quality ETF SPHQ, which has a five-star rating in Morningstar's U.S. Fund Large Blend category.

This fund tracks the S&P 500 Quality Index of 100 stocks, which is maintained by S&P Dow Jones Indices. The index is reconstituted twice a year, on the third Fridays of June and December. Stocks in the S&P 500 are narrowed down to the 100 that rank highest by a quality score combining return on equity, debt-to-book value and an "accruals ratio" of operating assets to total assets. They are then weighted within the index by multiplying the quality scores by the companies' market capitalizations. There are weighting constraints, including a 5% cap for each stock when the index is rebalanced.

Kalivas said the debt-to-equity scoring component tempers concerns about high returns on equity for companies with low levels of equity on their balance sheets.

The accruals component is interesting for investors seeking quality. "The idea is that companies with low accruals have a large amount of cash flowing through the balance sheet - a higher cash component to earnings," he said. This means a company that is slow in collecting payments after delivering products or providing services to its customers will be penalized through the scoring process. "Speedy collections would give lower accruals," Kalivas noted.

The scoring approach makes for a portfolio that is concentrated, with the largest 10 holdings making up 47.3% of the Invesco S&P 500 Quality ETF as of Friday. But only three of its top 10 holdings - Meta Platforms Inc. $(META)$, Apple and Nvidia - are also among the largest 10 components of the S&P 500.

Here are some performance figures for the two Invesco factor ETFs mentioned above and for SPY through Monday:

   Exchange-traded fund                Ticker    2025 return  3-year return  5-year return 
   Invesco S&P 500 Quality ETF         SPHQ             3.3%            63%           123% 
   Invesco S&P 500 Low Volatility ETF  SPLV             4.5%            21%            68% 
   SPDR S&P 500 ETF Trust              SPY             -0.2%            55%           119% 
                                                                           Source: FactSet 

The Invesco S&P 500 Low Volatility ETF has been the best performer among the three this year - it has done its job. But the Invesco S&P 500 Quality ETF has fared best over three and five years. Kalivas said that over the long term, SPLV has typically captured about 95% of upward movement for the S&P 500, while capturing about 90% of the full index's downside.

Top holdings of SPHQ

Here are the top 10 holdings of the Invesco S&P 500 Quality ETF as of Friday:

   Company                      Ticker   % of Invesco S&P 500 Quality ETF 
   Visa Inc. Class A            V                      5.8% 
   Netflix Inc.                 NFLX                   5.6% 
   Mastercard Inc. Class A      MA                     5.5% 
   Johnson & Johnson            JNJ                    5.5% 
   Meta Platforms Inc. Class A  META                   4.9% 
   Costco Wholesale Corp.       COST                   4.4% 
   Nvidia Corp.                 NVDA                   4.4% 
   Apple Inc.                   AAPL                   4.2% 
   Procter & Gamble Co.         PG                     4.0% 
   GE Aerospace                 GE                     3.0% 
                                                           Source: Invesco 

Click the tickers to learn more about any index, fund or company.

Read: Tomi Kilgore's detailed guide to the information available on the MarketWatch quote page

Don't miss: 20 stocks of companies showing excellent earnings-season trends even as the economy cools

-Philip van Doorn

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May 13, 2025 09:55 ET (13:55 GMT)

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