Domestic stocks posted another impressive annual performance in 2021, again outperforming international counterparts. However, that doesn’t mean the feat will be repeated in 2022.
As Goldman Sachs Asset Management (GSAM) points out in its recent 2022 investment ideas report, broad U.S. benchmarks face dual risks in the form of frothy valuations and elevated concentration, or too few stocks accounting for too large of a percentage of supposedly diversified indexes.
That could be a sign that equal-weight strategies, such as the Invesco S&P 500® Equal Weight ETF (RSP), are valid considerations for investors this year.
“The US equity market is also exceptionally concentrated—which is not the case in most other major equity markets. Roughly 20% of the market capitalization of the S&P 500 is in just five stocks, leaving investors overexposed to these companies, some of which may also be subject to increasing regulation and taxes,” according to GSAM.
Six stocks representing 20% of a supposedly broad index is indeed concentrated. Conversely, RSP doesn’t allocate more than 0.23% of its weight to any of its holdings. Even if RSP’s top 85 holdings had weights of 0.23% (which they don’t), the Invesco ETF would still be more diverse than the 20% to six stocks scenario found in the S&P 500.
Beyond concentration, the other issue with so few stocks representing out-sized percentages of broad domestic equity benchmarks is that those equities aren’t inexpensive, and they’re pushing up multiples on the S&P 500 and comparable indexes.
“Valuations for US stocks are high relative to their own history and relative to other regions—the S&P 500 still trades at a premium even after adjusting for its larger weightings to higher-valued sectors, such as technology,” adds GSAM.
Roughly 39% of RSP’s holdings are classified as value stocks, with just 17.5% in the growth category, according to issuer data. That value/growth gap in RSP could be advantageous for investors in 2022 as more market observers highlight elevated valuations on U.S. stocks.
One way of looking at RSP is that it could be ideally positioned to help investors deal with the possibility that U.S. stocks could be in for a year of more muted, if not necessarily poor, returns this year.
“We think US equities could still generate strong returns but the balance of risk and reward points to diversifying into other regions, global thematic strategies and sub- asset classes, such as small cap,” notes GSAM.
RSP isn’t littered with small-caps — that group represents just 1.93% of the fund’s weight — but it is heavily allocated to mid-caps to the tune of about 58%. That could work in the fund’s favor if large-caps prove lethargic in 2022, prompting investors to examine smaller stocks.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.