When investors think of equal-weight exchange traded funds, they typically think of large-cap strategies, including the Invesco S&P 500® Equal Weight ETF (RSP).
That makes sense not only because RSP is the largest equal-weight ETF, but also because concentration risk is becoming an issue with large-cap equal-weight funds as market values for the likes of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and others expand at a seemingly unrelenting pace.
However, equally weighting stocks works across cap spectrums. The Invesco S&P SmallCap 600 Equal Weight ETF (EWSC) proves that equal weight can work with small-caps. EWSC follows the S&P SmallCap 600 Equal Weight Index, the equal-weight offshoot of the widely observed S&P SmallCap 600 Index.
“Equally weighted indices have a smaller market capitalization mathematically so have outperformed the market cap weighted indices over the long term,” says S&P Dow Jones Indices. “Simply, the S&P equally weighted indices for their respective sizes use the universe from the relevant market cap universe and allocate 100%/(n stocks) weight to each stock, then rebalance quarterly. For example, the S&P 500 Equal Weight Index rebalances quarterly to equal weight each stock in the S&P 500 at the company level of 1/500 = 0.02%.”
While EWSC flies under the radar, it turns 11 years old in December, so it’s got a fairly lengthy track record, and an impressive one at that.
“Over the past 10 years, the S&P MidCap 400 Equal Weight Index produced average annualized returns of 10.6% compared with 9.7% for its cap-weighted equivalent. The S&P SmallCap 600 Equal Weight Index generated average annualized returns of 11.2% compared with 10.5% for its cap-weighted rival,” according to Investopedia.
Alright, to be fair, that article is dated to 2018. Past performance isn’t guaranteed to repeat. However, over the past three years, EWSC is beating the largest ETF tracking the cap-weighted S&P SmallCap 600 by 760 basis points. Year-to-date, the Invesco fund is topping its cap-weighted rival by 630 basis points.
EWSC’s largest holding commands a weight of 0.26%, while the biggest component in the cap-weighted S&P SmallCap 600 has a weight of 0.73%. EWSC devotes more than 48% to the financial services, industrial, and consumer discretionary sectors, whereas its cap-weighted peer’s top three sector exposures are financials, industrials, and tech, which combine for almost 49%.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.