Investors seeking exposure to U.S. large cap stocks have many options, but often may not be aware of the concentration risk they may be taking on through an S&P 500-indexed ETF.
Because the underlying index is market-cap-weighted, an ETF tracking it will have a large overweight to a handful of very large companies. Conversely, the smallest companies in the index will have near-inconsequential weights.
One approach to mitigate this concentration risk is to break the link between market capitalization and portfolio weighting. An equal-weight index is seeking to do that, by providing an investor with a more balanced approach to the companies that make up the S&P 500.
In fact, the S&P 500 Equal Weight Index has a well-established track record of outperformance versus the cap-weighted S&P 500 Index1. It also serves as the underlying index for Invesco S&P 500 Equal Weight Index ETF (EQL), which we launched in May of this year.
I recently discussed the merits of equal-weighting the S&P 500 with James Garcelon, Executive Vice-President at Shaunessy Investment Counsel, and Randall O’Leary from S&P Dow Jones Indices.
Click here to watch the interview with Christopher Doll.