Bullish Sentiment Could Propel Equal-Weight ETFs | ETF Trends

The S&P 500 peeled back over the past couple of days, but the benchmark domestic equity gauge is still higher by 7.52% and close to all-time highs.

That’s enough for many investors to remain bullish on stocks, and with the S&P 500 up 25% year-to-date, it’s been hard to be bearish. Data also suggest that investors are displaying enthusiasm toward equities, and that could benefit unique ways of approaching broad market benchmarks, including the Invesco S&P 500® Equal Weight ETF (RSP).

The $31.37 billion RSP, the largest equal-weight exchange traded fund by assets, is the ideal cure for mundane cap-weighted index broad market funds. It could also be appealing to investors at a time when market participants are displaying increasing risk appetite.

“US equity investor risk appetite improved for a second month running in November, rising to the highest since April. Expectations of near-term returns meanwhile hit a new high, fueled by improved prospects for earnings, equity fundamentals and shareholder returns, as well as brighter outlooks for macro and policy factors,” according to IHS Markit.

Up 6.08% over the past month, RSP is getting a lift from a somewhat rapid change in investor attitudes coming out of September.

“The swelling of risk appetite was accompanied by a marked uplift in investors’ expectations of market returns over the coming month to a survey high, surpassing the prior (April) peak by a wide margin and building further on the improvement seen in October,” adds IHS Markit. “By comparison, the survey’s Expected Returns Index had fallen to -12% in September, which preceded the brief market fall, before rising again to signal to a marked turnaround in sentiment which has gathered momentum over the past two months. The index has now risen to +38%.”

RSP is rewarding investors’ faith. This year, the equal-weight fund is beating the cap-weighted S&P 500 by about 160 basis points. Importantly, that’s not a one-off event. RSP has a lengthy track record of topping the cap-weighted S&P 500.

Additionally, the benefits offered by RSP don’t come with a significant uptick in risk. Over the past three years, RSP’s annualized volatility only exceeds that of the cap-weighted S&P 500 by a nominal amount. Plus, RSP can help investors skirt large allocations to richly valued stocks, which is something to consider in the current environment.

“With the S&P 500 reaching new highs, valuations against historical levels meanwhile remain by far the largest perceived anchor on the market, and is the only factor not to see an improving trend in November,” notes IHS Markit.

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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.