An undoubtedly nifty trait about environmental, social, and governance (ESG) investing, particularly when it comes to equities, is that ESG has ample versatility. It can be applied to various market capitalization segments, factors such as growth and value, and it’s useful with various weighting methodologies.
That includes equal weight. The Invesco ESG S&P 500 Equal Weight ETF (RSPE), which debuted Wednesday, brings the famed equal-weight methodology to the ESG landscape. If RSPE’s name sounds familiar, that’s because the new exchange traded fund is the ESG counterpart to the successful Invesco S&P 500 Equal Weight ETF (RSP) – the largest equal-weight ETF on the market.
The new RSPE follows the S&P 500 Equal-Weight ESG Leaders Select Index. That benchmark is the ESG derivative of the S&P 500 Equal Weight Index – RSP’s underlying benchmark. While RSPE is a new ETF, it has the potential to answer the all-important question about ESG returns and the possibilities of under- or out-performance.
“Based on this index construction, how does the S&P 500 Equal-Weight ESG Leaders Select Index perform? We can see an excess return over the S&P 500 Equal Weight Index with comparable volatility, realizing an improved risk-adjusted return over each period examined historically,” according to S&P Dow Jones Indices.
Applying ESG to the equal-weight S&P 500 also leads to an aura of exclusivity. While RSP holds all the stocks in the S&P 500, RSPE has a smaller lineup of 185 stocks. Of course, concentration risk is mitigated in RSPE as it is in RSP because the new ESG fund assigns a weight of just 0.76% to its largest component.
Importantly, RSPE lives up to its ESG directive as its overall ESG index score, and carbon intensity ratings compare favorably with non-ESG equivalents.
“There were large improvements in both the S&P DJI ESG Score and carbon intensity at the index level, with the S&P 500 Equal-Weight ESG Leaders Select Index relative to the S&P 500 Equal Weight Index achieving a stronger ESG profile and lower carbon footprint,” adds S&P Dow Jones.
In terms of factor exposures – a relevant point because it’s often asserted equal-weight returns are driven by small size and value – RSPE’s exposures are comparable to RSP’s, with the exception being that the former is less allocated to smaller stocks.
As is to be expected, there are sector differences between RSPE and RSP. The equal-weight ESG fund devotes 47.5% of its weight to tech, industrial, and consumer discretionary stocks, whereas RSP’s top three sector weights – tech, industrials, and financials – combine for about 43% of that fund.
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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.