The S&P 500 EWI 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. 

An equal-weight strategy, such as the Invesco S&P 500® Equal Weight ETF (RSP) or the Invesco ESG S&P 500 Equal Weight ETF (RSPE), can provide diversification benefits and reduce 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 April and by 2% for the first quarter. Key performance contributors for equal weight last month were the underweight to communication services and the overweight to energy, according to S&P Dow Jones Indices.

Nick Kalivas, head of factor & core equity product strategy, ETFs & indexed strategies, Invesco, said that 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.

From a factor perspective, since the index is equally weighting every quarter, it’s tilting towards size and value, Kalivas said.

“You get these small factor tilts,” Kalivas said. “Those are kind of rewarded factors over time and [equal weight] as a strategy has outperformed over time.” 

The S&P 500 has increasingly become more concentrated. Kalivas said that the weight overlap between the S&P 500 and the Nasdaq 100 has basically 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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