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. 

The simple arithmetic of rebalancing connects equally weighted indexes to momentum effects. If the price of a constituent increases by more than the average of its peers, then its weight in the portfolio will increase, and the position will necessarily be trimmed at the next rebalance as the portfolio returns to equal weights, according to S&P Dow Jones Indices.

On the other hand, if a stock falls by more than the average of its peers, its weighting will fall too, and more must be purchased at the next rebalance to return to equal weight. Thus, equal-weight indexes sell relative winners and purchase relative losers at each rebalance, according to S&P Dow Jones Indices.

The sector breakdown of the cap-weighted versus the equal-weighted S&P 500 is important for investors to consider.

Information technology is the largest sector in each index, though there is a rather large spread between the two. According to S&P Dow Jones Indices, information technology holdings in the equal-weighted index amount to 15.3%, compared to cap-weighted at 28%, according to S&P Dow Jones Indices.

In the equal-weighted index, information technology is followed by industrials and financials, rounding out the top three sectors at 14.4% and 13.3%, respectively, according to S&P Dow Jones Indices.

Healthcare holdings amount to 13%, consumer discretionary to 11.6%, consumer staples to 6.4%, utilities to 5.8%, and real estate to 5.7%. 

The bottom three sectors in terms of exposure include materials, communication services, and energy, which come to 5.6%, 4.6%, and 4.1%, respectively. 

The Larger Spread

There is a much larger spread between sectors when looking at the cap-weighted index. 

Information technology has a huge lead over other sectors in the cap-weighted index. The second and third sectors by weight are healthcare and consumer discretionary, which amount to 13.6% and 12%, respectively, according to S&P Dow Jones Indices. 

Financials amounts to 11.1%, communication services to 9.4%, industrials to 7.9%, and consumer staples to 6.1%.

Finally, four sectors are weighted at less than 5%, including the top-performing sector for all of 2021 and the first quarter for 2022, energy. Energy amounts to just 3.9%, utilities and real estate each to 2.7%, and materials to 2.6%.

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. 

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