The Invesco S&P 500® Equal Weight ETF (RSP) can be paired with factor ETFs to complement the fund’s tilt toward size and value.
Particularly as markets are anticipating an increase in volatility ahead, investors may want to enhance their core equity holdings. RSP is a favored strategy for investors looking to diversify their portfolios and reduce concentration risk.
RSP tracks the S&P 500 EWI, 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 EWI is allocated the same weight at each quarterly rebalance. By weighting each constituent company equally, a small group of companies does not have an outsized impact on the index.
Nick Kalivas, head of factor and core equity product strategy, ETFs, and indexed strategies at Invesco, said RSP can be paired up well with the Invesco S&P 500 Momentum ETF (SPMO) and the Invesco S&P 500 Low Volatility ETF (SPLV) in the current environment.
“I would say that low vol would work very, very well,” Kalivas told VettaFi. “Historically, the excess return correlations between the size and value factors and low volatility have been kind of low or negative. By itself, the fact that it’s smaller companies, the fact that RSP tends to tilt toward size and value, they tend to have higher standard deviations of return. And so low volatility would balance that off.”
The other way to look at it would be to pair RSP with the momentum factor. Due to its equal weight methodology, RSP is an anti-momentum type of strategy. Every quarter, the fund rebalances itself, selling the stocks that had done well during the quarter and buying the stocks that had lagged, bringing everything back to equal weights, according to Kalivas.
“Momentum is the opposite – it’s just latching on to what is doing well. So historically, the excess return correlation between momentum and value has tended to be negative,” Kalivas said. “I think at times quality could be thrown in there… [But I] prefer SPLV or SPMO as ways to pair it up.”
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