An equal-weight strategy can help ease volatility, especially when it comes to small caps and assets like the Invesco S&P SmallCap 600 Equal Weight ETF (EWSC ).
During the early stages of the economic re-opening, small cap equities have been shining stars.
“Small-cap strategies dominated the overall top 10 domestic equity rankings for the year ended March 31, according to the latest data from Morningstar Inc.’s separate account/collective investment trust database,” a Pensions & Investments article said.
“Among the top 10 strategies, nine were small-cap strategies,” the article added.
Small cap equities also have a tendency to make more pronounced moves in the market relative to large- and mid-cap equities. This market sensitivity means they can capture more upside when markets move higher, but also head lower in a downturn.
An equal-weight strategy can help dampen the shock by eliminating concentration risk. By not being too top heavy in one stock, the risk is spread around the ETF’s holdings. Up almost 30% for the year, EWSC seeks to track the investment results (before fees and expenses) of the S&P SmallCap 600® Equal Weight Index (the “underlying index”). The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
The underlying index consists of all of the components of the S&P SmallCap 600® Index, a broad-based index of approximately 600 securities that measures the small cap segment of the U.S. equity market.
“An equal-weighted index is just as it sounds,” an Investopedia article explained. “Every stock in the index has the same weight, regardless of how large or small the company is.”
A Strong Diversification Tool
An equal-weight strategy can also give investors the diversification they crave.
“Due to market-cap weighting, performance of the S&P 500 Index can be dominated by a small number of stocks,” an Invesco “Strategy Insights” report noted. “The 50 largest securities in the index represent nearly 50% of its weight, leaving the next 450 stocks to account for the remaining 50%.”
“The top 50 stocks in the S&P EWI, on the other hand, comprise just 11% of that index,” the report added. “Equal weighting means every stock has the same potential influence on the returns of the S&P EWI, whereas in the S&P 500 Index, a stock with a weight of 2% has 10 times the influence of one with a weight of just 0.2%.”
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