Recent polling data suggests that advisors prefer to maintain a diversified portfolio rather than utilize sector rotation strategies.
Most advisors do not rotate between sectors that they believe will outperform the broader market. In fact, nearly 56% of advisors polled said that their approach to sector allocation is investing in a diversified portfolio of sectors without making strategic bets on individual sectors, according to “How can an equal weight approach lead to potential outperformance?” (Date: May 15, 2023. Sample size: 257 respondents, 37.7% RIAs.)
The Invesco S&P 500® Equal Weight ETF (RSP) is based on the S&P 500 Equal Weight Index, which gives every security in the S&P 500 an equal weight at each quarterly rebalance. RSP’s equal weighting methodology focuses on individual securities but significantly impacts the fund’s sector breakdown.
“Many advisors do not realize they are heavily exposed to the information technology sector in cap-weighted strategies,” Todd Rosenbluth, head of research at VettaFi, said. “RSP spreads the risks around and has more exposure to defensive sectors like real estate and utilities.”
See more: “Overcome S&P 500 Concentration Risk with RSP“
How RSP’s Equal Weighting Affects Its Sector Breakdown
Every sector in RSP’s underlying index comprises between 4.3% and 14.3% of the index by weight. Conversely, sectors in the S&P 500 are weighted as low as 2.5% (real estate) and as high as 25.8% (information technology).
Equal weight’s top sector tilts compared to the benchmark include industrials, real estate, information technology, and communications. RSP’s underlying index overweights industrials (+6%) and real estate (+3%) but underweights information technology (-13%) and communications (-4%).
See more: “Invesco’s Nick Kalivas on the Early Days of RSP and Smart Beta“
The Invesco ESG S&P 500 Equal Weight ETF (RSPE) utilizes the same methodology but screens for ESG criteria.
RSPE has fewer holdings. It starts with the S&P 500 universe but excludes ESG offenders, holding 188 securities as of May 15. Securities in RSPE are each weighted around 0.5%, whereas each security is weighted around 0.2% in RSP.
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