Invesco S&P 500 Equal Weight ETF (RSP Quick QuoteRSP - Free Report) has been among investors’ most loved ETFs of 2023. This is especially true as it has gathered $9.3 billion in net flows so far this year, including $2 billion in net flows last month alone. With this, RSP is on track to exceed $10 billion in inflows in 2023, marking a record-flow year.

RSP, which was launched in 2003, has increasingly captured the attention of investors over the past few years. The fund experienced a substantial influx of $7.8 billion in 2021, followed by $5.2 billion in 2022. This marked a significant increase from the $684 million and $49 million recorded in 2020 and 2019, respectively, showcasing a clear upward trajectory in investor interest and capital inflow into the fund.

Invesco S&P 500 Equal Weight ETF is the largest equal-weight ETF with an AUM of $44 billion. It tracks the S&P 500 Equal Weight Index, which equally weights the stocks in the S&P 500 Index and results in an exposure that tilts toward smaller companies in the S&P 500 Index. Invesco S&P 500 Equal Weight ETF charges 20 bps in annual fees and trades in an average daily volume of 6 million shares (read: 5 Stocks That Powered S&P 500 ETF This Year).

The ETF is widely spread across sectors with industrials, financials, information technology, healthcare and consumer discretionary. It currently has a Zacks Rank #3 (Hold).

Behind the Success

The success of RSP hinges on its equal-weighted strategy, wherein each component of the index receives an equal weighting in the portfolio. This approach contrasts with traditional market-cap-weighted ETFs, wherein larger companies receive a higher weighting. Thus, equal-weight ETFs do a great job in managing single-security risk with their equal allocation in the entire spectrum of market-capitalization levels, regardless of size.

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 (read: 5 Sector ETFs That Beat the Market in November).

Overall, equal-weight ETFs not only go a long way in reducing overall risk but also provide higher diversification and higher returns over the long term than their market-cap counterparts. Further, these offer more upside potential due to higher concentration in small and mid-cap stocks than the market-cap-weighted funds. These have a minimal concentration risk but charge a hefty expense ratio than the fundamentally or capitalization-weighted counterpart.

Further, the continuous rebalancing required in equal-weight ETFs can contribute to improved performance, making them attractive options for investors seeking diversification and the potential for higher returns.

However, equal-weight ETFs are relatively less popular, thereby leading to lower average daily volumes and a wider bid/ask spread than market-cap cousins. This increases the total cost of trading beyond the expense ratio. Though these have a higher expense ratio and low trading volume, they do not seem to be big problems as the products avoid company-specific risk and enjoy diversification benefits (read: Buffett's Favorite 4 Sectors: ETFs in Focus).

Bottom Line

Invesco S&P 500 Equal Weight ETF's recent success highlights the growing appeal of equal-weight investment strategies.