There are many reasons why investors favor equal weighting over market cap-weighted strategies, including the enhanced diversification and historical outperformance.
An equal-weight strategy, such as the Invesco S&P 500 Equal Weight ETF (RSP) or the Invesco ESG S&P 500 Equal Weight ETF (RSPE), can reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.
RSP is based on the S&P 500 Equal Weight Index, and RSPE is based on the S&P 500 Equal Weight ESG Leaders Select Index. RSPE’s underlying index is designed to measure the equal-weighted performance of securities included in the S&P 500 Equal Weight Index that also meet ESG criteria, while maintaining similar overall industry group weights as the S&P 500 Equal Weight Index, according to Invesco.
RSPE is more concentrated because it excludes ESG offenders, holding 186 securities — compare this to the 503 holdings in RSP. Due to the difference in number of holdings and equal-weight methodology, the securities in RSPE are each weighted around 0.6%, whereas each security is weighted around 0.2% in RSP, according to ETF Research Center.
RSP and RSPE have 186 overlapping holdings, meaning that 37% of RSP’s holdings are also in RSPE. RSPE does not hold any securities that are not included in RSP.
Securities that can be found in RSP but have been screened out of RSPE include Enphase Energy (ENPH), EPAM Systems Inc. (EPAM), Constellation Energy Corporation (CEG), Netflix Inc. (NFLX), Boeing Co. (BA), Paycom Software Inc. (PAYC), Ceridian HCM Holding Inc. (CDAY), Amazon.com Inc. (AMZN), Broadridge Financial Solutions (BR), Duke Realty Corp. (DRE), among others, according to ETF Research Center.
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