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Invesco | March 31, 2021

Take the concentration out of the S&P 500 with Invesco S&P 500 Equal Weight Index ETF

Recent developments in the S&P 500 are an important reminder of the wisdom of the timeless adage: avoid putting all your eggs in one basket. Since its low on March 23, 2020, the S&P 500 has notched record gains1 and closed at a record high on Dec. 31, 2020,2 but a closer look reveals a more nuanced picture.

As a market capitalization-weighted index, the S&P 500 typically has a heavy concentration in a few names, and as its top five holdings  as of Dec. 14, 2020 — Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG/GOOGL), and Facebook (FB) — have zoomed ever higher in 2020, they have come to dominate the Index’s performance. While the S&P 500 ostensibly measures 500 companies, the five largest companies have grown to account for nearly 22.0% of its weighting, a significant rise from 16.8% at the end of 2019.3

Source: S&P 500 Dow Jones Indices. Data shown is from December 1970 to December 2020.
Past performance is no guarantee of future results. Index returns do not represent Fund returns. An investor cannot invest directly in an index.

As the S&P 500 has grown ever more top-heavy, many investors in products tied to the Index have found themselves facing historic levels of concentration risk, the likes of which passive investors have not seen since 1970 — half a century ago.4 

Such a high concentration in the S&P 500’s top five holdings potentially leaves investors vulnerable in the event that the companies’ current high valuations fall back to earth. Indeed, it’s worth keeping in mind what history has taught — that companies with seemingly unassailable positions can and do fade from the scene as their business models are disrupted or they fall victim to economic forces.

For example, in 1970 the top five holdings in the S&P 500 were IBM, AT&T, General Motors, Standard Oil of New Jersey, and Eastman Kodak.5 By 2000, the top five holdings had dramatically shifted, consisting of GE, ExxonMobil, Pfizer, Citigroup, and Cisco.6 Today, none of the aforementioned companies are even present in the top 10.

Take the concentration out of the S&P 500 with an equal weight approach

An equal weight approach can help address concerns about the growing concentration risk in traditional market cap-weighted indexes. It can provide diversification benefits and reduce concentration risk by weighting each constituent company equally, so that a small group of companies does not have an outsized impact on the index. 

Invesco S&P 500® Equal Weight Index ETF (EQL) takes an equal weight approach to the S&P 500, with each of its 500 constituent companies allocated approximately a 0.2% weighting in the portfolio.

EQL’s equal weight approach to the S&P 500 may offer a number of potential benefits. By reducing the heavy weightings allocated to the largest companies, EQL seeks to reduce the concentration risk of the S&P 500. With quarterly rebalances to maintain equal weightings, EQL’s methodology imposes a strict “buy low/sell high” discipline, trimming allocations to companies that have grown (sell high) and increasing allocations to companies that have underperformed (buy low).

The bottom line

As the largest companies in the S&P 500 have grown, traditional market capitalization-weighted approaches have left investors exposed to historic levels of concentration risk. An equal weight approach with EQL can potentially take the concentration out of the S&P 500.

Learn how to strike the right investment balance in your portfolio with the Invesco S&P 500 Equal Weight Index ETF.

1 Source: William Watts, “The stock market hasn’t seen a 100-day gain this strong since 1933,” MarketWatch, Dow Jones, Aug. 13, 2020

2 Source: William Watts, “S&P 500, Nasdaq close at records as stocks post modest gains,” MarketWatch, Dow Jones, Dec. 8, 2020

3 Source: S&P Global, as of Dec. 22, 2020

4 Source: S&P Dow Jones LLC, as of Dec. 22, 2020

5 Source: Michael Johnston, “Visual History of the S&P 500,” ETF Database, Dec. 14, 2012

6 Source: S&P Global, as of Dec. 22, 2020

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Header image: Stocksy

Commissions, management fees and expenses may all be associated with investments in exchange-traded funds (ETFs). ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at invesco.ca.

The companies mentioned on this document were selected for illustrative purposes only and are not intended to convey specific investment advice.

Concentration risk is the risk of amplified losses that may occur from having a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio.
The views and opinions expressed in this paper are based on current market conditions and are subject to change without notice; they are not intended to convey specific investment advice. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations.

You cannot invest directly in an index. Index performance does not reflect fees and expenses that would be applicable to a fund.

S&P®, Standard & Poor’s® and S&P 500 Equal Weight® are registered trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC. The S&P Equal Weight Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by Invesco Canada Ltd. This Invesco ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, and S&P Dow Jones Indices LLC makes no representation regarding the advisability of investing in such a product.

There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units.

Most Invesco ETFs seek to replicate, before fees and expenses, the performance of the applicable index, and are not actively managed. This means that the sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the index regardless of whether the financial condition of one or more issuers of securities in the index deteriorates. In contrast, if an Invesco ETF is actively managed, then the sub-advisor has discretion to adjust that Invesco ETF’s holdings in accordance with the ETF’s investment objectives and strategies.

Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence.

© Invesco Canada Ltd. 2021