Equal weight, the index methodology that assigns approximately the same weights to all of the benchmark’s components, is one of the oldest iterations of smart beta and remains popular with advisors and investors today.
The Invesco Russell 1000 Equal Weight ETF (NYSEArca: EQAL) is one equal-weight exchange traded fund (ETF) for investors seeking broad market exposure to consider. EQAL tracks the Russell 1000 Equal Weight Index.
That benchmark “is composed of securities in the Russell 1000 Index and is equally weighted across nine sector groups with each security within the sector receiving equal weight,” according to Invesco.
The ETF’s index methodology helps mitigate the sector biases inherent in a constituent equal-weight approach. This methodology also enables the index to contra-trade against the most recent price movements at the sector level as well as at the constituent level as the index rebalances.
“Equal weight is considered by many to be one of the oldest and most time-tested approaches to reduce portfolio concentration and enhance diversification,” said FTSE Russell in a recent note. “But how have equal weighted approaches stacked up relative to traditional market cap weighted approaches for long-term risk-adjusted performance? Quite well, in fact, according to new research from FTSE Russell.”
The index has provided downside protection over time, with smaller drawdowns than both its cap-weighted and constituent-only equal-weighted counterparts during the dotcom bubble bust and global financial crisis. Furthermore, Russell 1000 Equal Weight Index took less time to fully recover.
Additionally, the enhanced diversification has enabled the Russell 1000 Equal Weight Index to outperform the cap-weighted and a hypothetical constituent-only equal-weight index over the long term.
None of EQAL’s 963 holdings exceed a weight of 0.32% and the largest sector exposures, technology and industrials, have weights of just under 13%.
“Like any well-diversified strategy, an equally weighted approach can serve as an effective counterbalance over time to a capitalization weighted approach,” said John Feyerer, senior director equity ETF strategy, Invesco, in the note. “Innovations in recent years in index-based investment options have given investors more tools to help manage portfolio risk, enhance portfolio diversification and potentially enhance long-term portfolio performance.”
Year-to-date, EQAL is up 19.10% compared to a gain of 17.70% for the cap-weighted Russell 1000 Index.
For more information on the equal-weight indexing methodology, visit our equal-weight ETFs category.