MW This ETF briefly beat the S&P 500 in 2025. Why one analyst remains cautious.
By Isabel Wang
The equal-weight version of the S&P 500 is more heavily exposed to rate-sensitive and cyclical sectors such as industrials and financials
The S&P 500 is so top-heavy and expensive that many investors are wondering if now is a good time to pour their money into its less popular sibling that spreads its assets equally across the benchmark U.S. large-cap index.
The Invesco S&P 500 Equal Weight ETF RSP has risen 3.3% so far this year, slightly trailing the 3.4% advance of the traditional market-cap-weighted S&P 500 SPX in the same period. But RSP beat the S&P 500 in January, climbing 3.4% compared to a 2.7% monthly gain for the cap-weighted index, according to FactSet data.
RSP is frequently cited as an equal-weight counterpart to the cap-weighted version of the S&P 500 since it gives equal value to all of the stocks that are included the index, regardless of the size of the company.
While RSP aims to provide a broader picture of the stock market's performance by limiting the concentration risk in megacap technology companies, it is not as unbiased of an index as it may appear, according to DataTrek Research.
"Companies, not sectors, are weighted equally in the equal-weight S&P 500 index. While sector exposure varies widely in the cap-weight S&P 500, the same goes for RSP, just to a lesser degree," Jessica Rabe, co-founder of DataTrek Research, said in a Thursday client note.
"RSP is not a neutral index and still makes explicit sector 'calls' even if it weights individual companies evenly," she added.
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Sector weightings in the cap-weighted S&P 500 range from 1.9% in the materials sector to 30.7% in information-technology sector - a difference of nearly 29 percentage points (see table below). In the equal-weighted S&P 500 index XX:SP500EW, that range goes from 3.8% in communication services to 15.5% in the industrials sector, according to data compiled by S&P Dow Jones Indices.
To be sure, RSP does have less exposure to the megacap technology names than the cap-weight version of the S&P 500, but it is also much more overweight the interest-rate sensitive and cyclical sectors such as industrials and financials.
"As a result, overweighting the equal-weight S&P 500 isn't just limiting Big Tech exposure, it's also choosing to heavily overweight cyclical and rate sensitive sectors. That's especially true for industrials, which must now navigate potential U.S. trade wars," Rabe said.
Despite briefly outperforming the cap-weight S&P 500 in 2025, RSP has widely lagged its more popular counterpart in the current bull market, up only 42% compared with its counterpart's nearly 70% advance since October 2022, according to data compiled by DataTrek.
"The cap-weight S&P 500's outperformance versus its equal-weight counterpart over the last decade [see chart above] speaks to the increasing concentration of industry returns at the top of the leaderboard of Big Tech. We doubt this structural shift will suddenly change anytime soon, even with concerns over Chinese AI competition," Rabe said.
Rabe and her team continue to prefer the cap-weight S&P 500 than its equal-weight counterpart. They said Chinese startup DeepSeek's lower-cost AI model may hurt Nvidia Corp. $(NVDA)$, but it should boost other technology names like Meta Platforms $(META)$, Apple Inc. $(AAPL)$ and Alphabet Inc. $(GOOGL)$ $(GOOG)$, which "collectively have a larger weighting" in the cap-weight S&P 500.
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U.S. stocks finished mostly higher on Thursday as investors awaited January's employment report, which is set to release on Friday at 8:30 a.m. Eastern time. The Dow Jones Industrial Average DJIA fell 0.3%, while the cap-weight S&P 500 and the Nasdaq Composite COMP rose nearly 0.4% and 0.5%, respectively. The Invesco S&P 500 Equal Weight ETF, or RSP, was off 0.1%, according to FactSet data.
-Isabel Wang
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(END) Dow Jones Newswires
February 06, 2025 16:55 ET (21:55 GMT)
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