Invesco’s Nick Kalivas on Assessing Equal Weight’s Volatility

While equal weight has outperformed its cap-weighted parent S&P 500 consistently over the past year, the methodology is expected to be more volatile.

The S&P 500 Equal Weight Index, tracked by the Invesco S&P 500 Equal Weight ETF (RSP), tilts towards smaller size (47.8%), value (33.4%), and dividend (15.6%) factors compared to the S&P 500. It also tilts away from quality (-23.7%), low volatility (-6.0%), high beta (-4.5%), and momentum (-3.1%) as of September 30, according to S&P Dow Jones Indices.

“It’s still typically expected to be more volatile because of the fact that it holds smaller stocks,” Nick Kalivas, head of factor and core equity product strategy for Invesco, told VettaFi at Exchange: An ETF Experience.

Kalivas said that RSP has a higher allocation down the cap spectrum, and that the reconstitution process of equal weighting tends to lend well to value, introducing both small size and value factors, which typically have higher standard deviations than market cap.

“That’s the way I would approach risk from a standard deviation perspective, but I think there’s two other avenues, though,” Kalivas said. “One is the concentration risk. We all saw what happened to the big names last year, and so that’s still there. And then the other risk is that as you’ve looked over time, the overlap between the S&P 500 and the Nasdaq 100 has really trended higher.”

While the overlap between the S&P 500 and Nasdaq 100 declined slightly last year, it’s still high from a historical perspective.

“There is this risk or concern among investors that when you’re buying the S&P 500 cap weight, you’ve got this kind of growth tilt to it. And so how do you manage? There’s nothing wrong with growth, but you might be better off going equal-weight as a core.”

Kalivas said that investors can then complement RSP with focused growth exposure such as the Invesco S&P 500 GARP ETF (SPGP), the Invesco NASDAQ 100 ETF (QQQM), or the Invesco S&P 500 Pure Growth ETF (RPG). This approach prevents doubling up on growth in the core of a portfolio.

“That’s how I kind of view RSP in terms of the way to think about risk,” Kalivas said. “It is standard deviation, but it’s also concentration, it’s maybe cheaper valuation helping to limit some of the downside risk, and then it’s kind of the growthiness of the cap weight relative to the equal weight.”

The S&P 500 Equal Weight Index gained 7.4% in January, outperforming the S&P 500, which gained 6.3% during the month. After a turbulent 2022 and despite mixed earnings reports, the S&P 500 posted its best January performance in 2019.

Last year, the S&P 500 declined -18.1% in 2022 compared to RSP’s decline of -11.6%, each on a total return basis. While the S&P 500 EWI consistently outperformed last year, the gap between RSP and the S&P 500 widened substantially during the fourth quarter.

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