S&P 500 exchange-traded funds (ETFs) may be poised to have their day in the sun, and here’s why.
A dramatic selloff in Big Tech has sent the S&P 500 Index down more than 17% so far in 2022 — on pace to close out its worst year since 2008. And that’s with ETFs based on index that becomes independent of mega-cap stocks. such as apple (AAPL (opens in a new tab)) and Amazon.com (AMZN (opens in a new tab)) which has lost massive market value this year, detracting from its weight in the S&P 500.
An example, the iShares Core S&P 500 ETF stock price history (IV (opens in a new tab)) currently has 18.1% of its $303 billion in net assets invested in five stocks: Apple, Amazon, Microsoft (MSFT (opens in a new tab)), alphabet (GOOGL (opens in a new tab)) and Meta Platforms (META (opens in a new tab)). That’s down from a high of more than 24% in September 2020.
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That’s a good thing.
Estimates suggest that up to $7 trillion was invested in the S&P 500 in ETFs and mutual funds by the end of 2021. By early 2023, buyers of these funds will have a more balanced portfolio than in recent years.
That’s a good thing too.
However, many of these index ETFs that provide value based on market capitalization are still exposed to technology stocks. And with the Federal Reserve committed to keeping interest rates longer to keep inflation down, the problems Big Tech has seen this year are likely to continue.
One solution for investors is to use an equal-weight S&P 500 ETF that doesn’t play favorites.
The problem: There are only two options for US-listed S&P 500 equity funds available to investors. And both are offered by Invesco.
the Invesco S&P 500 Equal Weight ETF (RSP (opens in a new tab)) tracks the performance of the S&P 500 Equal Weight Index. ETFs and indexes are rebalanced quarterly. Based on 503 holdings, each stock in the ETF returns a weighted 0.20% on the third Friday in March, June, September and December.
Looking at the current RSP holdings, you can say that 304 is either flat or in positive territory since the last review in the third week of September, with a rerun in December.
The top three sectors in terms of weightage for RSPs are industrial (14.8%), technology (14.7%) and financials (13.6%). In addition, five sectors have a weight of 10% or more.
In comparison, IVV’s three largest sectors by market value are technology (26.5%), healthcare (14.9%) and finance (11.6%). Five of the aforementioned technology stocks are in the top 10. However, it is not in the top 10 of RSP.
In terms of performance, the equal-weighted S&P 500 ETF is down 12.3% year-to-date, 510 basis points better than the market-weighted average. (Basis point = 0.01%)
The mutual fund version is the Invesco Equally-Weighted S&P 500 Fund (VADAX (opens in a new tab)). It also tracks the performance of the S&P 500 Equal Weight Index, and holds similar stocks four times a year.
The big difference is the 0.52% expense ratio (or, $52 per year for every $10,000 spent), more than double the RSP’s 0.20%.
Other broad market-weighted ETFs covering 11 S&P 500 sectors include the Invesco S&P 500 Equal Weight Technology ETF (RYT (opens in a new tab)), the Invesco S&P 500 Equal Weight Health Care ETF shares (RYH (opens in a new tab)), Invesco S&P 500 Equal Weight Consumer Staples (RHS (opens in a new tab)). There are similar ETFs for energy, financials, utilities, consumer discretionary, utilities, industrials, real estate and telecommunications services.
Finally, if you want something less expensive, Invesco offers Invesco The value of the S&P 100 Equal Weight ETF shares (EQWL (opens in a new tab)). It tracks the performance of the S&P 100 Index, a composite of 100 large, blue-chip US companies.
Instead of rebalancing each quarter at 0.20% per holding as RSP does, it returns at 1.0%. EQWL charges five points higher in fees than RSP, but Morningstar gives the fund an overall five-star rating of 1,153.
If Big Tech struggles, RSP, VADAX, and other Invesco offerings are worth considering in 2023 and beyond.