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Good Time to Consider Equal-Weight ETFs

2022 is starting on a turbulent note for equities, but it may prove to be a good time for investors to consider equal-weight exchange traded funds.

ETFs such as the Invesco S&P 500® Equal Weight ETF (RSP), which is the largest fund in this category, minimize single stock risk. That’s a potential selling point for investors at a time when growth and technology stocks are weighing on the broader market.

“Indeed, the 29% monthly difference between the best- and worst-performing S&P 500® sectors in January 2022 was the highest since March 2020. Some market participants may be contemplating portfolio changes in response to recent drawdowns, but others may wish to consider the potential power of doing nothing,” says S&P Dow Jones Indices senior analyst Fei Wang.

As Weng notes, the S&P 500 Equal-Weight Index — RSP’s underlying benchmark — set a torrid pace for the three years ending 2021.

“By percentile ranking, the S&P 500 (95%), S&P 500 Equal Weight (97%), S&P 500 Materials (99%), S&P 500 Real Estate (100%), and S&P 500 Growth (96%) are all ranked above 95% percentile in their respective history,” Wang notes.

A similar phenomenon also applies to mid-cap stocks, which is one of the most overlooked segments of the equity market. Wang adds,  “the recent three-year performance for the S&P MidCap 400 and its related indices were also typically above their historical averages. The S&P MidCap 400 Industrials and Consumer Discretionary sectors posted particularly prominent returns relative to their respective historical returns, ranking in their 98% and 99% percentiles, respectively.”

Investors can access mid-cap stocks in equal-weight form with the Invesco S&P MidCap 400 Equal Weight ETF (NYSEARCA: EWMC), EWMC follows the S&P MidCap 400 Equal Weight Index, which is the equal-weight counterpart to the cap-weighted S&P MidCap 400.

Similar trends were at play with the various S&P SmallCap 600 benchmarks.

“All but three indices posted above average three-year rolling total returns, with the Information Technology sector’s returns within touching distance of its maximum,” concludes Wang.

Investors looking to access small-cap stocks in equal-weight form can consider the Invesco S&P SmallCap 600 Equal Weight ETF (EWSC). That ETF follows the S&P SmallCap 600 Equal Weight Index.

Year-to-date, each of the three equal-weight ETFs mentioned are beating the comparable cap-weighted funds by healthy margins.

For more news, information, and strategy, visit the Portfolio Strategies Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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