Gap Between Equal Weight and S&P 500 Near Historical High Last Month

Equal weight’s significant outperformance over its cap-weight parent, the S&P 500 Index, suggests strong payoffs to value and small size factor tilts in the current environment.

The S&P 500 advanced 5.6% in November compared to the S&P 500 Equal Weight Index’s gain of 6.7%. While equal weight has consistently outperformed this year, the gap between equal weight and the S&P 500 in November was in the top quintile of historical experience, according to S&P Dow Jones Indices.

The S&P 500 EWI includes all constituents in the S&P 500, giving them equal weights at each quarterly rebalance. Equal weight’s methodology of selling relative winners and buying relative losers adds factor tilts to a portfolio. As of the end of the third quarter, the S&P 500 EWI 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 Indexes.

S&P Dow Jones Indexes said in November it is relatively unusual for value to outperform growth in a month when the S&P 500 rises. Notably, equal weight has continued to outperform despite the S&P 500 now posting two consecutive months of positive performance.

According to S&P Dow Jones, the weighted average capitalization of most factor indexes is below that of the S&P 500, so, other things equal, most factor indices will benefit from a tailwind when smaller companies outperform.

The portfolio overlap, as measured by the percentage of index weights held in common, between the S&P 500 and equal weighting is 52% as of September 30, according to S&P Dow Jones Indexes.

Investors looking to get exposure to the S&P 500 EWI can look to the Invesco S&P 500 Equal Weight ETF (RSP). The Invesco ESG S&P 500 Equal Weight ETF (RSPE) offers the same methodology but screens for ESG criteria.

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