The ETF industry is abuzz this month as the original U.S.-listed exchange traded fund — a cap-weighted fund tracking the S&P 500 — celebrates its 30th anniversary. Not to be lost in the shuffle is the 20th anniversary of the S&P 500 Equal Weight Index. That benchmark is accessible via the Invesco S&P 500 Equal Weight ETF (RSP ). Home to nearly $35 billion in assets under management, RSP is the largest equal-weight ETF on the market today and turns 20 years old in April.
While it’s often said that past performance isn’t a guarantee of future returns — advice worth heeding — RSP and the S&P 500 Equal Weight Index have undeniably strong track records against cap-weighted competitors.
RSP remains relevant today, particularly because a plethora of market observers expect that small-cap stocks will outperform large-cap rivals again this year. The size factor is often cited as one of the reasons that equal-weight strategies can and do outperform cap-weighted equivalents.
“Arguably the biggest driver of the S&P 500 Equal Weight Index’s outperformance was its smaller size exposure. Having more (less) exposure to the smaller (larger) names in the S&P 500 explained over 50% of the S&P 500 Equal Weight Index’s relative returns, historically, and it was useful when exploring equal weight’s impact on risk/return. Indeed, it helped to explain the case for equal weight indexing amid the elevated concentration in S&P 500 constituents in recent years,” according to S&P Dow Jones Indices.
Value, which is the other oft-highlighted reason for equal-weight outperforming, is another RSP benefit. After all, that factor is on a two-year winning streak against growth, and more of the same could materialize in 2023.
“For example, the S&P 500 Equal Weight Index’s anti-momentum and value factor tilts, along with its distinct sector exposures, helped it to beat the S&P 500 by 7% in 2022. More strategically, the equal weight index benefited from positively skewed equity returns,” added S&P Dow Jones.
Beyond those benefits, RSP offers the obvious in terms of reduced concentration risk. Plus, it’s an efficient, cost-effective avenue for ordinary investors to gain access to a portfolio construction that’s deployed by many professional market participants.
“In addition to the potential relevance of the S&P 500 Equal Weight Index to those looking for large-cap U.S. equity exposure, there are several reasons why investors may wish to use the S&P 500 Equal Weight Index as a supplemental benchmark for large-cap U.S. equity managers. For example, the equal weight index may be a more suitable benchmark, given that it appears many active managers have historically been closer to equal weighting than cap weighting in their portfolio construction concluded S&P.
For more news, information, and analysis, visit our Portfolio Strategies Channel.
