Major U.S. stock market indexes changing quickly from red to green this week is a solid indication that volatility is back, making the equal-weight strategy inherent to the Invesco S&P 500® Equal Weight ETF (RSP) a viable option.
An equal-weight strategy can prevent investors from being too over-concentrated in one or a handful of stocks. To ease the pain of future downtrends while still capturing upside, RSP fits the bill.
Per its fund description, RSP seeks to track the investment results (before fees and expenses) of the S&P 500® Equal Weight Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
RSP’s balanced approach to its portfolio might dissuade short-term traders looking for quick gains during market movements. However, for the patient investor looking for long-term results, the fund is more ideal for this buy-and-hold strategy.
“This ETF is linked to the S&P 500 Index, however its unique weighting methodology will make it useful for some, while impractical for active traders,” an ETF Database analysis suggested. “Like many Rydex products, RSP is linked to an equal-weighted index, meaning that component companies receive approximately equal allocations. That results in exposure that is considerably more balanced than other alternatives such as SPY, and a methodology that some investors believe will add value over the long haul.”
A Strict “Buy Low, Sell High” Discipline
To help employ RSP’s strategy to an investor’s benefit, the fund follows strict guidelines. This includes being at the extreme ends of the familiar “buy low, sell high” mantra.
“With quarterly rebalances to maintain equal weightings, RSP’s methodology imposes a strict ‘buy low, sell high’ discipline, trimming allocations to companies that have grown (sell high) and increasing allocations to companies that have underperformed (buy low),” Invesco noted.
Moreover, the equal-weight strategy proves to be a winner over time. The fund’s five- and 10-year performances speak for themselves.
“Investors interested in strengthening their core holdings may also want to consider RSP,” they added. “On a year-to-year basis, the performance of RSP relative to the S&P 500 is not much better than a coin flip; however the win rate improves over longer periods of time, rising to 71% over a five-year period and 87% over a 10-year period.”
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