Equal-weight S&P 500 exchange-traded funds (ETFs) could be poised to have their day in the sun, and here’s why.
A stunning selloff in Big Tech has the S&P 500 Index down by more than 17% so far in 2022 – on pace to close out its worst year since 2008. And this has ETFs based on the index becoming far less reliant on mega-cap stocks like Apple (AAPL (opens in new tab)) and Amazon.com (AMZN (opens in new tab)) that have lost massive amounts of market value this year, reducing their weightings in the S&P 500.
As one example, the iShares Core S&P 500 ETF (IVV (opens in new tab)) currently has 18.1% of its nearly $303 billion in net assets invested in five stocks: Apple, Amazon, Microsoft (MSFT (opens in new tab)), Alphabet (GOOGL (opens in new tab)) and Meta Platforms (META (opens in new tab)). That’s down from its high of more than 24% in September 2020.
Subscribe to Kiplinger’s Personal Finance Be a smarter, better informed investor.
Save up to 74%
Sign up for Kiplinger’s Free E-Newsletters Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of Kiplinger’s expert advice – straight to your e-mail.
That’s a good thing.
Estimates suggest that as much as $7 trillion was invested in S&P 500-linked ETFs and mutual funds at the end of 2021. Heading into 2023, buyers of these funds will get a more balanced portfolio than in recent years.
That’s also a good thing.
Still, many of these index ETFs that assign weight based on market value still have outsized exposure to tech stocks. And with the Federal Reserve committed to keeping interest rates higher for longer in order to bring down inflation, the troubles Big Tech has seen this year could continue for the time being.
One solution for investors is to use equal-weight S&P 500 ETFs that don’t play favorites.
The problem: There are only two U.S.-listed S&P 500 equal-weight fund options available to investors. And both are offered by Invesco.
The Invesco S&P 500 Equal Weight ETF (RSP (opens in new tab)) tracks the performance of the S&P 500 Equal Weight Index. Both the ETF and the index are rebalanced quarterly. Based on 503 holdings, each stock in the ETF is rebalanced to a weighting of 0.20% on the third Friday in March, June, September and December.
By looking at RSP’s current holdings, you can tell that 304 are either flat or in positive territory since the last rebalancing in the third week of September, with the next rebalancing in December.
The top three sectors by weighting for RSP are industrials (14.8%), technology (14.7%), and financials (13.6%). In addition, five sectors have a weighting of 10% or higher.
By comparison, the market cap-weighted IVV’s top three sectors by weighting are technology (26.5%), healthcare (14.9%), and financials (11.6%). All five of the tech stocks mentioned earlier are in the top 10. However, none are in RSP’s top 10.
In terms of performance, the equal-weight S&P 500 ETF is down 12.3% year-to-date, 510 basis points better than the market cap-weighted one. (A basis point = 0.01%.)
The mutual fund version is the Invesco Equally-Weighted S&P 500 Fund (VADAX (opens in new tab)). It, too, tracks the performance of the S&P 500 Equal Weight Index, and has a similar number of holdings and rebalances four times a year.
The big difference is that the mutual fund has an expense ratio of 0.52% (or, $52 annually for every $10,000 invested), more than twice the RSP’s 0.20% fee.
Other broad-market equal-weighted ETFs revolving around the S&P 500’s 11 sectors include the Invesco S&P 500 Equal Weight Technology ETF (RYT (opens in new tab)), the Invesco S&P 500 Equal Weight Health Care ETF (RYH (opens in new tab)), Invesco S&P 500 Equal Weight Consumer Staples (RHS (opens in new tab)). There are similar ETFs for energy, financials, utilities, consumer discretionary, materials, industrials, real estate and communication services.
Lastly, if you want something less broad, Invesco offers the Invesco S&P 100 Equal Weight ETF (EQWL (opens in new tab)). It tracks the performance of the S&P 100 Index, a collection of 100 large-cap, blue-chip U.S. companies.
Instead of rebalancing each quarter to 0.20% per holding as RSP does, it rebalances to 1.0%. EQWL charges five basis points more in expense fees than RSP, but Morningstar gives it an overall five-star rating out of 1,153 funds.
As Big Tech struggles, RSP, VADAX, and the other Invesco offerings are worth considering in 2023 and beyond.