“Equal-weight S&P 500 ETF, a stable choice during the oscillation period of the seven giants.”
Recently, Wall Street has started to favor the use of equal-weighted indices such as the S&P 500, which is different from the traditional S&P 500 index.
The traditional S&P 500 index is market-cap weighted, so a few large-cap stocks have a significant weighting, while the equal-weighted S&P 500 index assigns the same weight to each stock, with each having a 0.2% allocation.”
The equal-weighted S&P 500 index currently holds an advantage.
Large-cap tech stocks have been influencing the fluctuations of the S&P 500 index, making the equal-weighted S&P 500 index an important gauge for measuring the performance of other markets.
According to a report by Janus Henderson, the expected P/E ratio of the market-cap weighted S&P 500 index is 21 times, while the equal-weighted version has an expected P/E ratio of 16 times, indicating the significant weight of large-cap tech stocks in the benchmark index.
Bespoke Investment Group also pointed out that the equal-weighted S&P 500 index has undergone a long adjustment period and may show outstanding performance again in the future.
Based on Factiva data, discussions about this index exceeded 6,000 times last year, which is half more than the 3,000 times the previous year, and Google search trends also show that the index’s online search volume has increased by nearly 4 times.
Fund Flows and Market Performance
The Invesco S&P 500 Equal Weight ETF has attracted a large amount of fund inflows. In the past 12 months, nearly $11 billion flowed in, expanding its size to over $54 billion.
In contrast, the SPDR S&P 500 ETF, which tracks the market-cap weighted S&P 500 index, attracted around $17 billion, reaching a size of $550 billion.John Frank, head of Invesco’s ETF experts, stated that the discussion frequency of the equal-weighted S&P 500 index ETF has never been this high before.
So far this year, while the equal-weighted S&P 500 index has a return of 7.6%, the traditional S&P 500 index has a return of over 18%.
However, besides the seven tech giants, the other 493 stocks in the S&P 500 index may perform better in the second half of the year.
Investors are starting to question whether the money invested in artificial intelligence can bring the expected returns, which may indicate that some overvaluation of the tech giants is overly optimistic.
Interest Rates and Industry Outlook
The Federal Reserve may cut interest rates in the second half of the year, which would benefit smaller stocks in the equal-weighted index.
These stocks have less cash, and access to the bond market is a priority, so lower interest rates can bring benefits.
Although the equal-weighted index is not considered a small-cap stock index, about one-third of it is invested in the 180 largest large-cap stocks in the market, while this proportion exceeds 80% in the S&P weighted index.
In the equal-weighted index, there are more industries such as utilities and real estate, accounting for approximately 13%.
In contrast, the S&P only has 5%. If a rate cut can stimulate the real estate market, these stocks may rise.
Furthermore, real estate stocks yield 3.4%, while utility stocks yield 3.1%. They may become more attractive than bonds during a rate cut.
The difference between the S&P 500 and the S&P 500 Equal Weight Index
The S&P 500 Index is market-cap weighted, with companies with larger market capitalization having a higher weighting. The top seven giants account for over 30% of the index.
On the other hand, the S&P 500 Equal Weight Index assigns an equal weight of 0.2% to each stock, significantly reducing the influence of large tech companies, with the top seven giants collectively accounting for less than 2%.
The S&P 500 Index has a high proportion of technology stocks, with other sectors (utilities and real estate) having smaller weightings, making large-cap stocks have a greater impact on the overall index.
In contrast, the S&P 500 Equal Weight Index has a balanced sector distribution, with sectors like utilities and real estate accounting for approximately 13%, making it more representative.
Due to the significant weight of large tech stocks, the S&P 500 Index has a forward P/E ratio of 21 times.
The S&P 500 Equal Weight Index has a forward P/E ratio of around 16 times, indicating lower dependence on large tech stocks and a relatively reasonable overall valuation.
When tech stocks perform strongly, the S&P 500 Index usually outperforms the Equal Weight Index, with a return of over 18% so far this year.
On the other hand, the S&P 500 Equal Weight Index is less affected by tech stocks and better reflects the overall market performance, with a return of 7.6% so far this year.
Due to the concentration of weight on a few large companies, the S&P 500 Index experiences increased volatility when the stock prices of these companies fluctuate significantly.
Conversely, the Equal Weight Index assigns the same weight to each stock, resulting in less impact from the price fluctuations of individual companies and lower overall volatility.
The S&P 500 Index has long been considered the “stock market representative” by investors, attracting significant funds. The SPDR ETF tracking the S&P 500 Index has approximately $550 billion in assets under management.
In recent years, the S&P 500 Equal Weight Index has gained attention from investors, especially in the context of tech dominance. The Invesco S&P 500 Equal Weight ETF (RSP) has seen net inflows of nearly $11 billion in the past 12 months, expanding its size to over $54 billion.
If the technology sector continues to perform strongly, the market-cap weighted S&P 500 index will continue to benefit. However, if the high valuation of technology stocks is questioned, their performance may be affected.
With the possibility of a rate cut by the Federal Reserve in the second half of the year, it would be favorable for smaller stocks in equal-weighted indices.
Therefore, if the seven tech giants fluctuate, the equal-weighted indices may relatively benefit.
What are the ETFs that track the equal-weighted S&P 500?
Invesco S&P 500 Equal Weight ETF (Invesco S&P 500 Equal Weight ETF, RSP): With assets over $54 billion (as of the latest data), an expense ratio of 0.20%, this ETF primarily tracks the S&P 500 Equal Weight Index, assigning equal weight to each stock to ensure the index performance is not dependent on a few large companies.
Invesco S&P MidCap 400 Equal Weight ETF (Invesco S&P SmallCap 600 Equal Weight ETF, EWSC): Although smaller in size, this ETF focuses on the mid-cap market with an expense ratio of 0.40%. It tracks the S&P MidCap 400 Equal Weight Index, evenly distributing the weight of mid-cap stocks.
Invesco S&P SmallCap 600 Equal Weight ETF (First Trust S&P 500 Equal Weight Technology ETF, RYT): Also smaller in size, this ETF concentrates on the small-cap market with an expense ratio of 0.40%. It tracks the S&P SmallCap 600 Equal Weight Index, balancing the weight of small-cap stocks.
First Trust S&P 500 Equal Weight Technology ETF (First Trust S&P 500 Equal Weight Technology ETF, RYT): With a moderate fund size and an expense ratio of 0.40%, this ETF primarily focuses on the equal-weight distribution of S&P 500 technology stocks, offering balanced investment opportunities within the technology sector.
First Trust S&P 500 Equal Weight Consumer Staples ETF (First Trust S&P 500 Equal Weight Consumer Staples ETF, RHS): With a moderate fund size and an expense ratio of 0.40%, this ETF primarily concentrates on the equal-weight distribution of S&P 500 consumer staples stocks, providing balanced investment opportunities within the consumer staples industry.
Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investment involves risks, so caution is advised when entering the market.
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