A Guide to the Benefits of Equal Weight Funds

The diversification benefits are a primary reason why investors favor equal-weighting over market cap-weighted strategies. An equal-weight strategy, such as the Invesco S&P 500 Equal Weight ETF (RSP B+) or the Invesco ESG S&P 500 Equal Weight ETF (RSPE C), can 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.

History shows that equal weight also tends to outperform. The S&P 500 EWI slightly outperformed the S&P 500 during the third quarter, continuing equal weight’s trailing 12-month relative outperformance. Key performance contributors for equal weight during the quarter were the underweight to communication services and the overweight to utilities, according to S&P Dow Jones Indices.

Equal weight also outperformed during the first half of the year, in which the S&P 500 EWI outperformed the S&P 500 by 2% in both the first and second quarters. 

RSP is based on the S&P 500 Equal Weight Index and RSPE is based on the S&P 500 Equal Weight ESG Leaders Select Index. RSPE’s underlying index is designed to measure the equal-weighted performance of securities included in the S&P 500 Equal Weight Index that also meet ESG criteria, while maintaining similar overall industry group weights as the S&P 500 Equal Weight Index, according to the firm.

RSPE is more concentrated, with 187 holdings compared to 504 holdings in RSP. At each rebalance, the securities in RSPE are each weighted at around 0.6% whereas each security is weighted at around 0.2% in RSP.

Holdings in RSP that have been screened out of RSPE include FedEx Corp (FDX), Duke Realty Corp (DRE), Boeing Co (BA), Incyte Corp (INCY), Eli Lilly & Co (LLY), Monster Beverage Corporation (MNST), Laboratory Corp of America Holdings (LH), Zoetis Inc (ZTS), Arthur J Gallagher & Co (AJG), and FactSet Research Systems Inc (FDS), among others. 

For more news, information, and strategy, visit our Portfolio Strategies Channel.