Investors doing enough research about equal-weight exchange traded funds, including the Invesco S&P 500® Equal Weight ETF (RSP), will certainly come across the word “diversification” or a synonym.
It makes sense because diversification is one of the primary benefits offered by equal-weight ETFs relative to their cap-weighted rivals. However, it’s not a word that should be tossed around lightly, and RSP has the track record to back the advantages of true holdings-level diversification.
In simple terms, it’s possible that as investors increase levels of diversification, they could enhance outcomes as well.
“By being less diversified, you may be missing out on potentially higher returns. The smallest 50 companies in the S&P 500 are about 1% of the index but provided about 4% higher return versus the largest 50 (from 12/31/2003, the year the S&P 500 Equal Weight Index was incepted, through 12/31/2020),” according to Invesco research.
Adding to RSP’s diversification credibility is this nugget, courtesy of Invesco. The 50 largest components in the cap-weighted S&P 500 combine for about half the index’s weight while the 50 smallest combine for a scant 1%. That’s meaningful not only from the perspective of reducing concentration risk, but also when it comes to performance, because the 50 smaller stocks beat the 50 largest by about 400 basis points on an annualized basis.
“The S&P 500 Equal Weight Index, which RSP tracks, has outperformed the S&P 500 Index based on rolling monthly periods over the past 3, 5 and 10 years,” adds Invesco.
That comes with each RSP holding weighing 0.20% when the fund is rebalanced. Interestingly, RSP’s potential to outperform the cap-weighted S&P 500 doesn’t solely boil down the size factor as some critics believe. Some research indicates that even when a substantial portion of the smaller stocks in an equal-weight benchmark are excluded, the index can still beat a cap-weighted equivalent.
Another perk with RSP is costs, or lack thereof. While equal weighting is the earliest iteration of smart beta, and smart beta usually carries higher fund fees than cap weighting, investors don’t pay up for the privilege of being involved with RSP.
“RSP has a management fee that is 75% less than its peers, and it hasn’t paid a capital gains distribution since inception in 2003, helping you keep more of what you earn,” concludes Invesco.
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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.