The S&P 500 EWI includes the same constituents as the traditional S&P 500, but size bias is removed in the EWI by allocating each constituent 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 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.
Nick Kalivas, head of factor and core equity product strategy, ETFs and indexed strategies, Invesco, said 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 weighted 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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