Buy low, and sell high. A simple adage for stock-picking advisors to follow, but one that is hard to implement. Even if an advisor could correctly identify which stocks were going to outperform the broader market on a consistent basis, it would be a challenge to sell the winners and buy more shares of the laggards as the instinct to let winners run sets in. However, 20 years ago today this buy-low-sell-high approach was made easier with the launch of the Invesco S&P 500 Equal Weight ETF (RSP).
ETFs began trading in the U.S. just over 30 years ago with the SPDR S&P 500 ETF (SPY), a market-cap-weighted version of the widely-followed and broad U.S. equity benchmark. Many subsequent equity ETFs were variations of SPY, with hefty stakes in the largest U.S. companies, even if those indexes were sliced based on growth or value attributes.
RSP takes a different approach. While SPY has large, concentrated bets on mega-caps Apple (7.2% of assets), Microsoft (6.2%), and Amazon.com (2.7%) but much less in the remaining 500 positions in the ETF, RSP holds roughly the same 0.20% weighting in each of its 503 holdings. It truly loves each of its constituents the same.
Indeed, the fund’s relatively high recent weightings in stocks like Intuitive Surgical (0.26%), Tyler Technologies (0.23%), and Teleflex (0.23%) are the result of recent stock performance and not the companies’ overall size. If the recent strength for these shares persists for future weeks until RSP has its next quarterly rebalance in June, the position size will be trimmed, with the proceeds used to boost recent underperformers like American Airlines (0.17%), Comerica (0.15%), and DISH Network (0.14%).
Investors in RSP do not have to do anything to reap the benefits of buying low and selling high. While some people have referred to RSP as a mid-cap strategy, the mean and median market capitalizations of $72 billion and $30 billion, respectively, as of March 2023 prove otherwise.
The stocks in RSP are equally weighted, but the sectors are not like they are for other alternatively-weighted S&P 500 based ETFs. Industrials (14% of assets), financials (14%), health care (14%), and information technology (13%) are the largest for RSP, but, for example, the fund has only 4.3% in communications services. However, RSP is more sector-diversified than SPY, which has a 26% stake in information technology, with more moderate health care (15%), financials (13%), industrials (8.6%), and communications (8.0%) exposure.
Advisors have embraced RSP over the years, pushing its asset base to $34 billion, with more than $2 billion of net inflows in the past year. The ETF has traded more than three million shares on average over the last 30 days, with tight spreads. While RSP’s expense ratio of 0.20% is higher than SPY’s, advisors get the meaningful benefits of rebalancing for this modest premium.
On a three-year basis as of March 2023, the S&P index behind RSP had a 22% annualized total return that was stronger than the 18% gain for the S&P index behind SPY. In 2022, the equal-weighted approach really shone. Despite incurring a slightly higher standard deviation, on a risk adjusted basis, the alternative-index approach was much stronger (1.12 vs. 0.94).
Happy birthday, RSP. While you are not yet old enough to legally drink in the U.S., many advisors who own shares of this Invesco ETF should be raising a glass in your honor today, while they manage a well-diversified and recently-rebalanced portfolio. VettaFi will be celebrating RSP’s key milestone even more in the coming weeks, so stay tuned.
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