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Vanguard S&P 500 Index ETF (VFV)
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Invesco S&P 500 Equal Weight ETF (RSP)
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Invesco S&P 500 Equal Weight Index ETF (EQL.U)
I recently read a recent article in the Financial Post:
“The S&P 500’s performance in 2024 made investing look easy. Why bother with strategy?”
Since the ‘Magnificent 7’ stocks dominate ETFs such as VFV, I’m concerned that the S&P 500 represents a very lop-sided weighting of its constituent stocks. We do hold VFV in several of our combined accounts, but am considering selling 25% of VFV and using the proceeds to purchase some EQL.U, an ETF that has never had a question on 5i. I’m aware that an equal weighting strategy results in a tilt towards mid-cap stocks (a good thing?), has a higher expense ratio (not so good) and has higher volatility (again, not so good).
Do the benefits of equal weighting in the S&P 500 outweigh the disadvantages? What is your take on this strategy? Are there similar ETFs to EQL.U that we could consider? Would RSP be one of them?
Thanks as always for your insight.
We tend to prefer more of an equal weight approach in general. It gives every opportunity more of a chance to contribute to returns opposed to the handful of larger names. So, we wouldn't have much in the way of concern with using an equal weight approach. On fees, the fees for EQL are 0.25%, so we would also not be too concerned here.
Equal weight approaches have underperformed market-cap weighted due to the great performance of mega-cap names over the years and this trend may continue. We think adding a bit of equal weight diversification, away from market-cap weights can make sense and balances out the mega-cap concentrations, particularly considering that most investors more than likely have exposure to those names elsewhere in their portfolio as well.
RSP would be another fine option.
Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in VFV.