Equal Weighting Mitigates Concentration Risk | ETF Trends

In the current environment where cap-weighted indexes are dominated by just a few names, equal weighting can mitigate concentration risk.

Advisors can use the Invesco S&P 500® Equal Weight ETF (RSP) as the core equity holding in client portfolios to remove size bias. Equal weighting offers more protection if a large company or sector experiences a downturn.

Launched in 2003, RSP is the largest equal-weight ETF, with $32.7 billion in assets under management. RSP is based on the S&P 500 Equal Weight Index, comprising all constituents in the S&P 500. The index gives each security an equal weight at quarterly rebalances.

See more: “Pair Equal Weight With Momentum to Generate Excess Returns

If the price of a constituent increases by more than the average of its peers, then its weight in the portfolio will increase, and the position will necessarily be trimmed at the next rebalance as the portfolio returns to equal weights, according to S&P Dow Jones Indices.

An equal weighting methodology tilts the index in favor of smaller-sized companies, effectively overweighting or underweighting certain sectors compared to the cap-weighted S&P 500.

RSP’s underlying index tilts toward industrials and real estate. Conversely, the index tilts away from the information technology and communications services sectors compared to the S&P 500.

See more: “How Equal Weighting at the Stock Level Impacts Sector Exposures

Equal Weighting With an ESG Lens

The Invesco ESG S&P 500 Equal Weight ETF (RSPE) offers the same equal weighting exposure, but it includes screening for ESG criteria.

RSPE has fewer holdings, as it starts with the S&P 500 universe but excludes ESG offenders, holding 188 securities, as of May 23. RSPE weights each security around 0.5% compared to around 0.2% in RSP.

For more news, information, and analysis, visit the Portfolio Strategies Channel.