The S&P 500 Equal Weight Index lagged its cap-weighted parent S&P 500 in April, marking the third consecutive month of underperformance after a long period of outperformance.
The market’s recovery continued in April as investors focused on first-quarter earnings reports, further propelled by expectations of just one more interest rate hike from the Fed. Each factor index reported positive returns, except for high beta, with momentum and defensive factors in the lead.
Equal weight, tracked by the Invesco S&P 500® Equal Weight ETF (RSP), underperformed the S&P 500 by 1% in April. The relationships between Equal Weight and the S&P 500 reversed in April compared to the first quarter, according to S&P Dow Jones Indices.
RSP gives every security in the S&P 500 an equal weight at each quarterly rebalance. Equal weight’s methodology of selling relative winners and buying relative losers adds the small size and value factor tilts to a portfolio, which led to the strategy’s significant outperformance last year.
According to S&P Dow Jones Indices, there was a powerful positive relationship between each factor index’s exposure to low volatility and its relative return in April. The higher a factor index’s exposure to low volatility was at the beginning of April, the better its relative return tended to be, S&P Dow Jones Indices wrote in its monthly dashboard.
Why Equal Weight Lagged In April
Equal weight largely lagged during the month due to its underweight to the information technology sector and overweight to smaller caps within the financials sectors. The equal-weight sectors that outperformed their cap-weighted counterparts in April included utilities, real estate, consumer discretionary, and industrials.
The Invesco ESG S&P 500 Equal Weight ETF (RSPE) offers the same methodology as RSP, but screens for ESG criteria. Equal-weighted strategies can provide diversification benefits and 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.
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