The Invesco S&P 500® Equal Weight ETF (RSP) is a favored strategy for investors looking to diversify their core equity holdings 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.
Equal-weight indexes also regularly outperform their market cap-weighted counterparts. The S&P 500 EWI outperformed the S&P 500 by 2% in both the first and second quarters of 2022.
Despite the benefits of equal weighting, cap weighting is still more 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, Nick Kalivas, head of factor and core equity product strategy, ETFs & indexed strategies at Invesco, said.
Kalivas said 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 added.
“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.”
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