Overcome S&P 500 Concentration Risk with RSP | ETF Trends

Many advisors use the Invesco S&P 500® Equal Weight ETF (RSP) as the core equity holding in client portfolios as it removes size bias, effectively mitigating concentration risk.

RSP is based on the S&P 500 Equal Weight Index, which is designed to be a size-neutral version of the S&P 500. It includes the same constituents as the cap-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated the same weight — 0.2% — at each quarterly rebalance.

The simple arithmetic of rebalancing connects equally weighted indexes to momentum effects. If the price of a constituent increases by more than the average of its peers, then its weight in the portfolio will increase, and the position will necessarily be trimmed at the next rebalance as the portfolio returns to equal weights, according to S&P Dow Jones Indices.

On the other hand, if a stock falls by more than the average of its peers, its weighting will fall too, and more must be purchased at the next rebalance to return to equal weight. Thus, equal-weight indexes sell relative winners and purchase relative losers at each rebalance, effectively reducing concentration risk.

The Invesco ESG S&P 500 Equal Weight ETF (RSPE) utilizes the same methodology, but screens for ESG criteria.

RSPE has fewer holdings as it starts with the S&P 500 universe but excludes ESG offenders, holding 182 securities as of April 11. Due to the difference in the number of holdings and equal-weight methodology, the securities in RSPE are each weighted around 0.6%, whereas each security is weighted around 0.2% in RSP.

Securities that can be found in RSP but have been screened out of RSPE as of January 10 include Align Technology Inc, Meta Platforms Inc, Catalent Inc, General Electric Company, First Solar Inc, West Pharmaceutical Services, Warner Bros Discovery Inc, Wynn Resorts, Monolithic Power Systems Inc, and MarketAxess Holdings, according to ETF Research Center.

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