Effectively provides mid-cap exposure.
by Venkata Sai Uppaluri
10/28/2019
Invesco S&P 500 Equal Weight ETF gives overweightings to smaller stocks in the S&P 500, but that probably won’t give it a durable edge over the market after adjusting for risk. It warrants a downgrade to a Morningstar Analyst Rating of Neutral from Bronze. Previously, the fund was rated based on its ability to beat the large-blend category average. However, as a strategic-beta fund, the category index, the Russell 1000, is the better benchmark.
The fund fully replicates the S&P 500 Equal Weight Index, which includes all stocks in the S&P 500 and weights them equally. By assigning an equal weight to the smallest stocks in the S&P 500 as the largest, the fund mechanically overweights the smaller stocks in the S&P 500 and underweights the larger names in the index. This pulls the average market capitalization of its holdings closer to that of the Russell MidCap Index than to the S&P 500. As a result, the fund carries higher risk than the market-cap-weighted S&P 500. The fund delivers similar performance to market-capitalization-weighted mid-cap funds.
Equal weighting helps this portfolio avoid increasing its exposure to areas of the market as they become more expensive, which is a criticism of market-cap-weighting. However, it fails to benefit from the market’s collective wisdom about the relative value of each security. Market prices tend to do a good job reflecting information that is available to the public, making it hard to beat the market without taking more risk, especially over the long term. By ignoring this information, the fund may increase its exposure to stocks with deteriorating fundamentals and trim positions in firms with improving outlooks when it rebalances to restore its equal weightings each quarter.
Equal weighting is arbitrary. While it may reduce concentration and give this fund less exposure to firm-specific risk than the S&P 500, it also increases turnover and transaction costs.
Invesco charges 0.20% annually for this fund. Although it is cheaper than actively managed funds in the large-blend Morningstar Category, there are cheaper alternatives.
Portfolio Construction
The fund fully replicates the S&P 500 Equal Weighted Index, which invests in the same stocks as the S&P 500 but weights them equally instead of by their market capitalization (each holding has 0.2% weight at rebalance). Equal weighting is arbitrary and causes this fund to overweight the smaller stocks in the S&P 500. A market-cap-weighted mid-cap index would likely provide similar exposure with lower turnover and transaction costs. It earns a Neutral Process Pillar rating. Each quarter, this well-diversified fund pares stocks that have outperformed and adds to names that have underperformed (which may have become cheaper), effectively mitigating the risk of single-security concentration that market-cap-weighted funds are more likely to have. This also helps the fund avoid loading up on areas of the market as they become more expensive. However, this approach prevents the fund from benefiting from the market’s collective wisdom. Market prices tend to do a good job reflecting information that is available to the public and will increase or decrease exposure to stocks accordingly.
Fees
Invesco charges a 0.20% annual fee for this fund, lower compared with actively managed funds, but there are cheaper alternatives. It earns a Positive Price Pillar rating. During the past three years through September 2019, the fund lagged the S&P 500 Equal Weighted Index by 27 basis points, an amount slightly larger than its fee.
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