U.S. large-cap equal weight ETFs introduce sector tilts to a portfolio.
The Invesco S&P 500 Equal Weight ETF (RSP) is the oldest single-factor ETF available to investors, accreting $32.6 billion in assets under management since its 2003 inception. RSP is based on the S&P 500 Equal Weight Index, comprising all constituents in the S&P 500 but giving each an equal weight at quarterly rebalances.
Equal weight ETFs reduce concentration risk and offer more protection if a large company or sector experiences a downturn. This methodology tilts the index in favor of smaller-sized companies, effectively overweighting or underweighting certain sectors compared to the cap-weighted S&P 500.
The S&P 500 Equal Weight Index tilts toward industrials and real estate. Industrials are weighted 14% in the equal weight index versus 8% in the S&P 500, and equal weight gives real estate a 6% weight versus 3% in cap weight, as of February 28.
The two sectors most underweighted in RSP are information technology and communications services, which are weighted 15% and 4%, respectively, in the equal weight index. In comparison, the cap-weight S&P 500 weights information technology and communications services at 265 and 7%, respectively.
Equal weight’s methodology of selling relative winners and buying relative losers adds factor tilts to a portfolio. As of the end of the third quarter, the S&P 500 Equal Weight Index tilts towards small size (47.8%), value (33.4%), and dividend (15.6%) compared to the S&P 500. It also has a tilt away from quality (-23.7%), low volatility (-6.0%), high beta (-4.5%), and momentum (-3.1%), according to S&P Dow Jones Indexes.
The Invesco ESG S&P 500 Equal Weight ETF (RSPE) offers the same methodology as RSP but implements a screen for ESG criteria. RSP and RSPE each charge 20 basis points.
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