An investor portfolio can’t thrive if it’s too top heavy in one or even a few stocks. The same is true for ETFs, where an equal-weight strategy could help with diversification and also risk mitigation.
An equal-weight strategy is just that: constructing a portfolio with equal allocations over all its holdings. For a simplistic example, imagine an ETF with four stocks. In equal-weight strategies, each one gets a 25% allocation to comprise the fund.
Popular ETFs which use an equal-weight strategy often include slicing and dicing the S&P 500. In these funds, constituents in the S&P 500 index get equal exposure. That’s the strategy inherent in funds like the Invesco S&P 500® Equal Weight ETF (RSP).
As mentioned, one of the benefits of an equal-weight strategy is that the fund won’t be too heavily concentrated in one or a few stocks. As such, investors get equal exposure to stocks irrespective of size, so large caps get the same allocation as small caps in order to achieve a higher level of diversification.
Exposure to small caps especially can allow for better performance, albeit with more risk. That’s because when markets trend higher, small caps can make amplified moves to the upside. Meanwhile, in down-trending markets, large caps can offer safety due to their relatively lower volatility.
Get Tailored Exposure With Equal-Weight
An equal-weight strategy doesn’t have to confine itself to a broad market index like the S&P 500. It can also apply to specific sectors, allowing ETFs with exposure in a sectors-specific area like healthcare or technology.
Invesco, for example, has range of ETF products that cater to the equal-weight strategy. As mentioned, there are sector-specific ETFs that utilize the strategy in order to get customized exposure like the Invesco S&P 500 Equal Weight Health Care ETF (RYH) or the Invesco S&P 500 Equal Weight Real Estate ETF (EWRE).
Adding an equal-weight strategy can help diversify a portfolio, especially when market conditions warrant stronger performance for an equal-weight strategy versus a market cap-based strategy. It’s just one of the many tools investors can add to their proverbial toolbox when building a portfolio that can weather all market conditions.
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