The S&P 500 EWI is designed to remove size bias from the S&P 500.
The S&P 500 EWI, which is tracked by the Invesco S&P 500® Equal Weight ETF (RSP), includes the same constituents as the cap-weighted S&P 500, but each company in the S&P 500 EWI is allocated the same weight at each quarterly rebalance.
An equal-weight strategy is favored for providing diversification benefits and reducing concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.
Equal-weight indexes also regularly outperform their market cap-weighted counterparts. The S&P 500 EWI outperformed the S&P 500 by 2% in the first half of the year, according to S&P Dow Jones Indices.
While equal weight provides unique exposure and has historically demonstrated outperformance, cap-weighting remains more popular because it is what most investors are familiar with.
Nick Kalivas, head of factor and core equity product strategy, ETFs & indexed strategies, Invesco, said cap weighting is popular because it’s very inexpensive, and it’s the benchmark — investors, both retail and institutional, will naturally flow into cap-weighted products when adding equity exposure.
Kalivas added that diversification is a significant benefit of equal weighting. “When you look at the S&P 500, the top 10 names finished last year with about 30% of the index. So you’ve got this really, really big concentration, and I think when people are investing, they’re not thinking about putting that much of their money in just a handful of names and so they’re thinking more broadly — and that’s what really equal weight offers,” Kalivas said.
The S&P 500 has increasingly become more concentrated. Kalivas added that the weight overlap between the S&P 500 and the Nasdaq 100 has doubled in the past 10 years.
“It finished last year with around 42% overlap, so you’ve seen this kind of growth drift happen in the S&P 500,” Kalivas said. “I think if you’re thinking about making the core of your portfolio, you probably want something that’s just more generally representative equity, and you can get your growth through another ETF or whatever vehicle you want… So, I think for that reason, RSPs got a lot of benefit as being the anchor — kind of your base equity exposure.”
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