Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for October 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for October 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Do Equal Weight ETFs Beat Cap Weight Counterparts?

July 11, 2024 • Posted in Size Effect

“Stock Size and Excess Stock Portfolio Growth” finds that an equal-weighted portfolio of the (each day) 1,000 largest U.S. stocks beats its market capitalization-weighted counterpart by about 2% per year. However, the underlying research does not account for portfolio rebalancing costs and may not be representative of other stock universes. Do exchange-traded funds (ETF) that implement equal weight for various U.S. stock indexes confirm findings? To investigate, we consider eight equal-weight ETFs, four alive and four dead:

  • Invesco S&P 500 Equal Weight ETF (RSP) – seeks to track investment results (before fees and expenses) of the S&P 500 Equal Weight Index. The capitalization-weighted counterpart is SPDR S&P 500 ETF Trust (SPY).
  • First Trust NASDAQ-100 Equal Weight ETF (QQEW) – seeks to track investment results (before fees and expenses) of the NASDAQ-100 Equal Weight Index. The capitalization-weighted counterpart is Invesco QQQ Trust (QQQ).
  • Invesco S&P 100 Equal Weight ETF (EQWL) – seeks to track investment results (before fees and expenses) of the S&P 100 Equal Weight Index. The capitalization-weighted counterpart is iShares S&P 100 ETF (OEF).
  • Invesco Russell MidCap Equal Weight ETF (EQWM) – seeks to track investment results (before fees and expenses) of the Russell Midcap Equal Weight Index. The capitalization-weighted counterpart is iShares Russell Mid-Cap ETF (IWR). The offeror discontinued this fund in July 2019.
  • Invesco Russell 2000 Equal Weight ETF (EQWS) – seeks to track investment results (before fees and expenses) of the Russell 2000 Equal Weight Index. The capitalization-weighted counterpart is iShares Russell 2000 ETF (IWM). The offeror discontinued this fund in February 2019.
  • Invesco S&P MidCap 400 Equal Weight ETF (EWMC) – seeks to track investment results (before fees and expenses) of the S&P MidCap 400 Equal Weight Index. The capitalization-weighted counterpart is SPDR S&P MidCap 400 ETF Trust (MDY). The offeror effectively discontinued this fund in August 2023 by changing its allocation rules.
  • Invesco S&P SmallCap 600 Equal Weight ETF (EWSC) – seeks to track investment results (before fees and expenses) of the S&P SmallCap 600 Equal Weight Index. The capitalization-weighted counterpart is Vanguard S&P Small-Cap 600 Index Fund (VIOO). The offeror discontinued this fund in February 2023.
  • Invesco Russell 1000 Equal Weight ETF (EQAL) – seeks to track investment results (before fees and expenses) of the Russell 1000 Equal Weight Index. The capitalization-weighted counterpart is iShares Russell 1000 ETF (IWB).

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted prices for the 16 ETFs as available (limited by equal-weighted funds) through June 2024, we find that: (more…)

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Daily Email Updates
Login
Questions?