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.
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.
The S&P 500 EWI outperformed the S&P 500 by 0.8% in May, a continuation of the 2% outperformance demonstrated in April. Key performance contributors for equal weight were the underweight to technology and the overweight to energy, according to S&P Dow Jones Indices.
Nick Kalivas, head of factor & core equity product strategy, ETFs & indexed strategies at Invesco, said that cap weighting is 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. However, 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 stated. “Those are kind of rewarded factors over time and [equal weight] as a strategy has outperformed over time.”
For more news, information, and strategy, visit our Portfolio Strategies Channel.
