The ETF industry is abuzz this month as the original U.S.-listed exchange traded fund — a cap-weighted fund tracking the S&P 500 — celebrates its 30th anniversary. Not to be lost in the shuffle is the 20th anniversary of the S&P 500 Equal Weight Index. That benchmark is accessible via the Invesco S&P 500 Equal Weight ETF (RSP). Home to nearly $35 billion in assets under management, RSP is the largest equal-weight ETF on the market today and turns 20 years old in April.
While it’s often said that past performance isn’t a guarantee of future returns — advice worth heeding — RSP and the S&P 500 Equal Weight Index have undeniably strong track records against cap-weighted competitors.
RSP remains relevant today, particularly because a plethora of market observers expect that small-cap stocks will outperform large-cap rivals again this year. The size factor is often cited as one of the reasons that equal-weight strategies can and do outperform cap-weighted equivalents.
“Arguably the biggest driver of the S&P 500 Equal Weight Index’s outperformance was its smaller size exposure. Having more (less) exposure to the smaller (larger) names in the S&P 500 explained over 50% of the S&P 500 Equal Weight Index’s relative returns, historically, and it was useful when exploring equal weight’s impact on risk/return. Indeed, it helped to explain the case for equal weight indexing amid the elevated concentration in S&P 500 constituents in recent years,” according to S&P Dow Jones Indices.
Value, which is the other oft-highlighted reason for equal-weight outperforming, is another RSP benefit. After all, that factor is on a two-year winning streak against growth, and more of the same could materialize in 2023.
“For example, the S&P 500 Equal Weight Index’s anti-momentum and value factor tilts, along with its distinct sector exposures, helped it to beat the S&P 500 by 7% in 2022. More strategically, the equal weight index benefited from positively skewed equity returns,” added S&P Dow Jones.
Beyond those benefits, RSP offers the obvious in terms of reduced concentration risk. Plus, it’s an efficient, cost-effective avenue for ordinary investors to gain access to a portfolio construction that’s deployed by many professional market participants.
“In addition to the potential relevance of the S&P 500 Equal Weight Index to those looking for large-cap U.S. equity exposure, there are several reasons why investors may wish to use the S&P 500 Equal Weight Index as a supplemental benchmark for large-cap U.S. equity managers. For example, the equal weight index may be a more suitable benchmark, given that it appears many active managers have historically been closer to equal weighting than cap weighting in their portfolio construction,” concluded S&P.
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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.