This article is the first in a series exploring equal-weight ETFs.
After the market downturn last week, in which the S&P 500 fell 1.7% and the Dow lost 600 points, some investors are turning to equal-weight exchange-traded funds (ETFs) to cushion their portfolios against another downturn.
When an ETF’s portfolio is equally weighted, all companies or sectors in it are equally favored, regardless of market capitalization or size. This contrasts with a market-cap-weighted ETF, in which a specific sector or company can attain a disproportionate weight in the portfolio.
Thus, when setting a market-cap-weighted ETF and an equal-weight ETF with the same stocks in each portfolio side-by-side, we can see that those funds fill their holdings differently. One of the most famous equal-weight ETFs is one that my Successful Investing and Intelligence Report readers will find familiar, as it has been a mainstay in our Growth and Tactical Trends Portfolios since November 2020: the Invesco S&P 500 Equal Weight ETF (NYSEARCA: RSP).
Not surprisingly given the ETF’s name, RSP takes all the stocks in the S&P 500 and weights them equally. As a result, many small-cap and mid-cap stocks that would be overshadowed in a market-cap-weighted portfolio get their chance to shine more brightly in an equal-weighted ETF. At the same time, since the portfolio does not favor a specific sector, the ETF is relatively well-cushioned from sector downturns.
Some of the fund’s holdings include Centene Corporation (NYSE: CNC), American Airlines Group, Inc. (NASDAQ: AAL), Incyte Corporation (NASDAQ: INCY), EOG Resources, Inc. (NYSE: EOG), Lumen Technologies, Inc. (NYSE: LUMN), Cabot Oil & Gas Corporation (NYSE: COG), Expedia Group, Inc. (NASDAQ: EXPE) and Diamondback Energy, Inc. (NASDAQ: FANG).
This fund’s performance has been relatively strong, even when including the damage done by the COVID-19 pandemic. As of Sept. 21, RSP has been down 2.07% over the past month and up 0.77% for the past three months. It currently is up 18.64% year to date.
Chart courtesy of www.stockcharts.com
The fund has amassed $29.19 billion in assets under management and has an expense ratio of 0.20%. While RSP does provide an investor with a way to profit from an equally balanced portfolio, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.