Sometimes, knowing pure performance figures is enough for investors. Along those lines, as of Nov. 15 the Invesco S&P 500 Equal Weight ETF (RSP) is outpacing rival cap-weighted S&P 500 exchange traded funds by 600 basis points on a year-to-date basis.
For more inquisitive investors, it’s worth examining why the S&P 500 Equal Weight Index – RSP’s underlying benchmark — is beating its cap-weighted counterpart this year. It’s also worth remembering that RSP has a well-documented history of beating cap-weighted S&P 500 ETFs, which is to say what’s happening in 2022 isn’t a new phenomenon.
Equal-weight critics frequently assert that the methodology’s high performance, when it arrives, is usually attributable to the size factor, the value factor, or both. During the prior bull market, the value argument didn’t hold water because growth stocks trounced value equities. This year, the size argument is flawed because small-caps are following large-caps to the downside.
This year, RSP is benefiting from a value tilt, or lack of exposure to mega-cap growth stocks, confirming some durability in a turbulent market setting.
“The S&P 500® Top 50 declined by 19% over the past 12 months, underperforming the S&P 500 by 5%. The unsurprising result is that S&P 500 Equal Weight Index, which by definition is underweight these mega-cap names, has outperformed. The equal weight index beat the S&P 500 by 5% in the 12-month period ending October 2022,” according to S&P Dow Jones Indices.
While RSP is often heralded for equally weighting S&P 500 stocks, its sector allocations differ from those of the parent index. This year, that’s a good thing. RSP allocates less than 19% of its weight to technology and communication services stocks – two laggard sectors this year.
Alone, tech accounts for 26.46% of the cap-weighted S&P 500, and those sector differences are part of the reason why RSP’s annualized volatility is 150 basis points below that of the cap-weighted S&P 500 on a year-to-date basis.
Indeed, some of equal weight’s factor biases are working in favor of RSP this year, including a value tilt and a tilt away from momentum.
“The S&P 500 Equal Weight Index’s anti-momentum bias, the product of selling relative winners and purchasing relative losers at each rebalance, has aided outperformance as a result of the momentum factor’s weakness for most of this year. The strategy’s implicit value bias has also been a source of outperformance, given the strong turnaround in the performance of value strategies this year,” concluded S&P Dow Jones.
For more news, information, and strategy, visit the Portfolio Strategies Channel.
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.