The S&P 500 Equal Weight Index underperformed its cap-weighted parent S&P 500 in April, underperforming for the third month in a row after a long period of outperformance.
The market recovery continued in April as investors focused on the first-quarter earnings report, fueled by expectations of just one more interest rate hike from the Fed. Every factor index except High Beta reported positive returns, with momentum and defensive factors leading the way.
Equal Weight, Tracked By Invesco S&P 500® Equal Weight ETF (RSP), underperformed the S&P 500 by 1% in April. The correlation between equal weighting and the S&P 500 reversed in April compared to the first quarter, according to the S&P Dow Jones Index,
The RSP assigns equal weighting to each security in the S&P 500 on each quarterly rebalancing. The equal-weight method of selling relative winners and buying relative losers adds small size and value factor to a portfolio, which led to the strategy’s significant performance last year.
According to the S&P Dow Jones Indices, there was a powerful positive correlation between each factor index’s exposure to low volatility and its relative return in April. S&P Dow Jones Indices noted in its monthly dashboard that the higher a factor index’s exposure to low volatility in early April, the better its relative return.
The equal weight decreased substantially during the month due to its lower weight to the information technology sector and higher weight to small caps within the financial sectors. Equal-weight sectors outperformed their cap-weighted counterparts in April, including utilities, real estate, consumer discretionary and industrials.
Invesco ESG S&P 500 Equal Weight ETF (RSPE) Provides a similar methodology to RSP, but screens for ESG criteria. Equal-weighting strategies 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 excessive impact on the index.
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