Significant inflows have been seen in the Invesco S&P 500® Equal Weight ETF (RSP) this month, as it pulled in $1.6 billion, almost all of which was added last week. This sudden influx of capital into the fund could suggest that equal-weight strategies may be back in favor with advisors.
What Caused a Jump in Flows for RSP?
With an equal-weight index strategy such as RSP, smaller-cap stocks have just as much weight as larger-cap stocks when the index is rebalanced. This means that such strategies have more exposure to the small-size factor than cap-weighted approaches. Mega-cap stocks have less influence on index movements. Equal-weighted indexes often outperform when market breadth improves.
Market breadth generally refers to the number of stocks moving an index or the market in a particular direction. A note last Wednesday from Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, said that market breadth for the S&P 500 Index had strengthened in June from the end of May, meaning that more stocks are moving the index in a positive direction. The vast majority of stocks in the index had positive returns for the first seven days of June. However, the year-to-date numbers are closer to a 50-50 split.
At the end of May, the eight largest stocks in the index could have turned the S&P 500’s performance negative, but as of June 7, that number has risen to the top 20 stocks, according to Silverblatt.
RSP’s Year-to-Date Performance
This year, RSP tracked fairly closely with its cap-weighted counterparts until March, when it began to underperform significantly. During the month, it saw significant outflows. This continued into April and, to a lesser degree, May as that performance gap persisted. It’s possible that investors may have questioned the value of an equal-weighted strategy at that time. In the first quarter, the top 10 contributors to the S&P 500 Index’s performance drove 90% of its gains, something that RSP missed out on because it offers reduced exposure to the largest securities in the index.
However, the flow trend seems to have reversed. RSP is still underperforming relative to its cap-weighted brethren. The increase in market breadth has likely caused investors to take another look at the potential benefits of an equal-weighted strategy.
It’s worth noting that RSP is a massive fund, with over $35 billion in assets under management. As a result, it is subject to significant swings in capital flows. The recent inflows into RSP could suggest that investors believe the fund is poised for another rally similar to those it has seen in the past.
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