Too much of a good thing can apply to equities exposure, and with exchange traded funds (ETFs) like the Invesco S&P 500® Equal Weight ETF (RSP ), holdings get equal billing to help balance portfolios.
As Invesco’s website puts it, RSP prevents investors from “putting your eggs in one basket.” It can be easy to fall into the trap of allocating too heavily into one or more stocks to extract maximum gains, such as big tech heavy-hitters like Apple or Amazon.
While there’s nothing wrong with getting exposure to these companies, the problem could be compounded when markets head downward. In the midst of heavy sell-offs, investors could experience large drawdowns when they’re too heavily exposed to certain stocks.
This is especially the case when it comes to the S&P 500. Extreme concentration risk could result when investors leave themselves vulnerable by investing too much in the index’s top holdings.
“As the S&P 500 has grown ever more top-heavy, many investors in products tied to the Index have found themselves facing historic levels of concentration risk, the likes of which passive investors have not seen since 1970 — half a century ago. Such a high concentration in the S&P 500’s top five holdings potentially leaves investors vulnerable in the event that the companies’ current high valuations fall back to earth,” the Invesco website noted.
Dividing Holdings Equally
RSP’s equal weight approach to the S&P 500 may offer investors a number of potential benefits. By reducing the heavy weightings allocated to the largest companies by divvying up holdings equally, RSP seeks to reduce the concentration risk.
“Investors concerned about the growing concentration risk in traditional market cap-weighted indexes may want to consider an equal weight approach,” the website added. “An equal weight approach 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. Invesco S&P 500® Equal Weight ETF (RSP) takes an equal weight approach to the S&P 500, with each of its 500 constituent companies allocated approximately a 0.2% weighting in the portfolio.”
Investors who are hesitant on whether this equal weight approach can truly extract gains from the S&P 500 only have to look at the past year’s performance. The ETF is up 40% within the last 12 months, proving that it can capture upside while still protecting from the downside by reducing concentration risk.
For more news, information, and strategy, visit the Portfolio Strategies Channel.