Even as the broader market rallies, the S&P 500 Equal Weight Index has continued to outperform its cap-weighted parent index by a sizable — and increasing — margin.
Equal weight’s underweight of mega-cap growth companies has been a key contributor to the index’s outperformance this year, as these companies have been particularly sensitive to rising interest rates, persistent high inflation, and a strong U.S. dollar.
Year-to-date through November 15, the S&P 500 has declined by 16.8% while the Invesco S&P 500 Equal Weight ETF (RSP), which tracks the S&P 500 EWI, has declined by 10.9%, according to YCharts.
The spread between the indexes’ returns has increased following disappointing Q3 earnings from big tech companies; less than a month ago, year-to-date through October 20, the S&P 500 was down 22.1% while equal weight had declined 18% during the same period.
The portfolio overlap between the two indexes, as measured by the percentage of index weights held in common, is 52% as of October 31, according to S&P Dow Jones Indices.
Equal weight’s factor tilts towards small size and value have helped it outperform the benchmark this year. As of September 30, the S&P 500 Equal Weight has a tilt towards small size (47.8%), value (33.4%), and dividend (15.6%) compared to the S&P 500. It also has a tilt away from quality (-23.7%), low volatility (-6.0%), high beta (-4.5%), and momentum (-3.1%), according to S&P Dow Jones Indices.
As of the end of October, equal weight has outperformed the S&P 500 by 5% over a 12-month period. The S&P 500 EWI slightly outperformed the S&P 500 during the third quarter of 2022, while equal weight outperformed the S&P 500 by 2% in both the first and second quarters of 2022.
Equal weight strategies can provide diversification benefits and reduce concentration risk by limiting the impact that an individual security’s movements can have on the overall fund.
For more news, information, and strategy, visit the Portfolio Strategies Channel.