We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Equal-Weight ETFs Beating Market-Cap Peers This Year
Read MoreHide Full Article
Wall Street has been struggling this year, thanks to Russia’s invasion of Ukraine, tightening monetary policy and surging prices, which continue to weigh on investor sentiment. In fact, the U.S. stock market wrapped up its worst first-half performance in more than 50 years with many analysts expecting more pain ahead (read: Wall Street on Track for Worst 1H: 4 Top-Ranked ETFs Win).
Though the decline was broad-based, equal-weighted ETFs performed little better than their market-cap counterparts. This is especially true as Invesco S&P 500 Equal Weight ETF (RSP - Free Report) , Invesco S&P MidCap 400 Equal Weight ETF and Invesco S&P SmallCap 600 Equal Weight ETF declined 15.9%, 17.1% and 18.7%, respectively, so far this year. In comparison, cap-weight ETFs — SPDR S&P 500 ETF (SPY - Free Report) , SPDR S&P MidCap 400 ETF (MDY - Free Report) and SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report) — have plunged 19%, 18.7% and 23.1%, respectively.
The Fed’s aggressive tightening policy has raised fears of a recession. The central bank lifted interest rates by 75 basis points (bps) in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. The central bank is on pace to hike rates again in July by another 75 bps, as tracked by the CME's Fed Watch Tool.
An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending, thereby hurting economic growth (read: ETFs to Gain from Rising Rates).
As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation may continue to hurt growth.
Reasons for Outperformance
Equal-weight ETFs do a great job in managing single-security risk, thanks to their equal allocation in the entire spectrum of market capitalization levels regardless of size. As such, these limit the risk of a severe downfall in any particular security, providing a nice balance in the portfolio. Additionally, with quarterly rebalancing, equally-weight funds tend to cash in on the overvalued segments and reinvest in the underperforming ones, potentially allowing for outperformance if the trends reverse.
Overall, these funds not only go a long way in reducing overall risk but also provide higher diversification and higher returns over the long term when compared to the market cap counterparts. Further, these offer more upside potential due to higher concentration in small and mid-cap stocks as compared to cap-weighted funds. These have a minimal concentration risk but charge a hefty expense ratio compared to the fundamentally/capitalization-weighted counterpart.
Invesco S&P 500 Equal Weight ETF tracks the S&P 500 Equal Weight Index, which equally weights the stocks in the S&P 500 Index. It charges 20 bps in annual fees and has amassed $29.3 billion in its asset base. Invesco S&P 500 Equal Weight ETF trades in an average daily volume of 2.8 million shares and has a Zacks Rank #3 (Hold) (read: Inverse S&P 500 ETFs to Bet on Bearish Trend).
Invesco S&P MidCap 400 Equal Weight ETF
Invesco S&P MidCap 400 Equal Weight ETF tracks the S&P MidCap 400Equal Weight Index, which equally weights mid-cap securities in the S&P MidCap 400 Index. It has AUM of $108.5 million and charges 40 bps in annual fees. Invesco S&P MidCap 400 Equal Weight ETF trades in an average daily volume of 5,000 shares and has a Zacks Rank #3.
Invesco S&P SmallCap 600 Equal Weight ETF
With AUM of $49.8 million, Invesco S&P SmallCap 600 Equal Weight ETF follows the S&P SmallCap 600 Equal Weight Index, which equally weights small-cap securities in the S&P SmallCap 600 Index. It charges 40 bps in annual fees and trades in an average daily volume of 6,000 shares. Invesco S&P SmallCap 600 Equal Weight ETF has a Zacks Rank #3,
Bottom Line
These equal-weight ETFs are relatively less popular, thereby leading to lower average daily volumes and a wide bid/ask spread compared to market-cap cousins. This increases the total cost of trading beyond the expense ratio.
Though these ETFs have a higher expense ratio and low trading volume, these do not seem to be big problems as the products avoid company-specific risk and enjoy diversification benefits.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Equal-Weight ETFs Beating Market-Cap Peers This Year
Wall Street has been struggling this year, thanks to Russia’s invasion of Ukraine, tightening monetary policy and surging prices, which continue to weigh on investor sentiment. In fact, the U.S. stock market wrapped up its worst first-half performance in more than 50 years with many analysts expecting more pain ahead (read: Wall Street on Track for Worst 1H: 4 Top-Ranked ETFs Win).
Though the decline was broad-based, equal-weighted ETFs performed little better than their market-cap counterparts. This is especially true as Invesco S&P 500 Equal Weight ETF (RSP - Free Report) , Invesco S&P MidCap 400 Equal Weight ETF and Invesco S&P SmallCap 600 Equal Weight ETF declined 15.9%, 17.1% and 18.7%, respectively, so far this year. In comparison, cap-weight ETFs — SPDR S&P 500 ETF (SPY - Free Report) , SPDR S&P MidCap 400 ETF (MDY - Free Report) and SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report) — have plunged 19%, 18.7% and 23.1%, respectively.
The Fed’s aggressive tightening policy has raised fears of a recession. The central bank lifted interest rates by 75 basis points (bps) in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. The central bank is on pace to hike rates again in July by another 75 bps, as tracked by the CME's Fed Watch Tool.
An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending, thereby hurting economic growth (read: ETFs to Gain from Rising Rates).
As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation may continue to hurt growth.
Reasons for Outperformance
Equal-weight ETFs do a great job in managing single-security risk, thanks to their equal allocation in the entire spectrum of market capitalization levels regardless of size. As such, these limit the risk of a severe downfall in any particular security, providing a nice balance in the portfolio. Additionally, with quarterly rebalancing, equally-weight funds tend to cash in on the overvalued segments and reinvest in the underperforming ones, potentially allowing for outperformance if the trends reverse.
Overall, these funds not only go a long way in reducing overall risk but also provide higher diversification and higher returns over the long term when compared to the market cap counterparts. Further, these offer more upside potential due to higher concentration in small and mid-cap stocks as compared to cap-weighted funds. These have a minimal concentration risk but charge a hefty expense ratio compared to the fundamentally/capitalization-weighted counterpart.
Equal-Weight ETFs in Focus
Invesco S&P 500 Equal Weight ETF (RSP - Free Report)
Invesco S&P 500 Equal Weight ETF tracks the S&P 500 Equal Weight Index, which equally weights the stocks in the S&P 500 Index. It charges 20 bps in annual fees and has amassed $29.3 billion in its asset base. Invesco S&P 500 Equal Weight ETF trades in an average daily volume of 2.8 million shares and has a Zacks Rank #3 (Hold) (read: Inverse S&P 500 ETFs to Bet on Bearish Trend).
Invesco S&P MidCap 400 Equal Weight ETF
Invesco S&P MidCap 400 Equal Weight ETF tracks the S&P MidCap 400Equal Weight Index, which equally weights mid-cap securities in the S&P MidCap 400 Index. It has AUM of $108.5 million and charges 40 bps in annual fees. Invesco S&P MidCap 400 Equal Weight ETF trades in an average daily volume of 5,000 shares and has a Zacks Rank #3.
Invesco S&P SmallCap 600 Equal Weight ETF
With AUM of $49.8 million, Invesco S&P SmallCap 600 Equal Weight ETF follows the S&P SmallCap 600 Equal Weight Index, which equally weights small-cap securities in the S&P SmallCap 600 Index. It charges 40 bps in annual fees and trades in an average daily volume of 6,000 shares. Invesco S&P SmallCap 600 Equal Weight ETF has a Zacks Rank #3,
Bottom Line
These equal-weight ETFs are relatively less popular, thereby leading to lower average daily volumes and a wide bid/ask spread compared to market-cap cousins. This increases the total cost of trading beyond the expense ratio.
Though these ETFs have a higher expense ratio and low trading volume, these do not seem to be big problems as the products avoid company-specific risk and enjoy diversification benefits.