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TICKERS: EQL, EQL.F, EQL.U

Invesco S&P 500 Equal Weight Index ETF - CAD

Invest in the possibilities of balanced growth with exposure to the S&P 500 Index.

Why invest in EQL?

Not all S&P 500® ETFs are created equal. If your clients are invested in funds that track the S&P 500, their portfolios may be too concentrated and miss out on potentially higher returns. EQL can help address both concerns with the added potential benefit of cost-effectiveness.

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What is Invesco's S&P 500 Equal Weight Index ETF?

ETF Strategist Darim Abdullah explains how the Invesco S&P 500 Equal Weight Index ETF (EQL) can provide access to the S&P 500 Index as a potential strategy to help mitigate concentration risk, address stretched valuations, and enhance portfolios.

Transcript

[00:06] Invesco's S&P 500 Equal Weight Index ETF, with the ticker EQL, provides exposure to the broad S&P 500 index, which many consider the bellwether representation of the US stock market.

[00:16] However, instead of having the underlying stocks weighted based on their traditional market capitalization, the ETF, as its name suggests, equally weighs each underlying stock, helping clients access the S&P 500 Index.

[00:32] To achieve this objective, the index sells overvalued stocks and buys undervalued ones during its quarterly rebalancing, ensuring that each individual stock has a 0.2% weight after each rebalance.

[00:45] Quarterly rebalancing also creates a more stable exposure to sectors compared with the S&P 500 Index, which may reduce the impact of market bubbles.

[00:54] It's worth noting that EQL is the first and only ETF in Canada that equally weighs the underlying stocks of the S &P 500 Index.

Why would investors consider the Invesco S&P 500 Equal-Weight Index ETF (EQL)?

[01:06] If you are invested in strategies that track the S&P 500 Index or the broad US market, you may have enjoyed the returns over the past few years.

[01:18] However, this may have come at the cost of concentration risk and stretched valuations. Let's explore how an equally weighted approach to the S&P 500 Index can potentially help you address these concerns.

[01:31] A quick look at the broad US market, represented by the S&P 500 Index, shows that it has been overshadowed by the so-called Magnificent 7, leading to the S&P 500 Index reaching a record concentration level.

[01:45] Digging deeper and looking at the top ten holdings, one can see that they make up about 32% of the Index, the highest level since the late 1970s.

[01:55] So why does this matter? We believe it's important because the traditional market cap weighting naturally understates the future disruptors.

[02:03] Twenty years ago, the current 10 names represented only 4% of the Index. The equal weight strategy can help mitigate concentration risk, ensuring a broad exposure to the S&P 500 Index.

[02:16] The second concern is the stretched valuations of the S&P 500 Index, which the heightened concentration in the top 10 holdings has contributed to over the past few years.

[02:25] As of the end of March, 2024, the high valuations in mega-cap names have pushed the S&P 500 forward P/E ratio to 21.9, while the equal weight index had a forward P/E ratio of 18.3.

[02:40] This means that the equal weight strategy was trading at a 16% discount to the S&P 500 Index.

[02:48] Looking at historical trends, over the past 20 years, the equal weight and the cap weighted S&P 500 have had similar P/E ratios.

[02:55] Trading at a 16% discount makes the equal weight strategy attractive from a valuation perspective, and its approach may help mitigate some of the valuation risk present in the S&P 500 Index.

What role does the Invesco S&P 500 Equal-Weight Index ETF (EQL) play in a portfolio?

[03:11] Invesco's S&P 500 Equal Weight strategy aims to provide broad and core U.S. equity exposure by equally weighting the underlying holdings while alleviating concentration risk and addressing stretched valuations of the S&P 500 Index.

[03:30] All of that is offered cost-effectively with its management expense ratio being 80% lower than the average mutual fund or ETF in the U.S. equity Morningstar category.

[03:41] Three potentially effective ways to implement EQL in portfolios include diversifying traditional and market cap-weighted U .S. equity exposure, complementing large cap and growth -oriented strategies, or replacing high fee and under-performing strategies.

 

 

  • Diversification away from concentration

    The weight of the top 10 companies in the S&P 500 currently make up 32% of the index1. You may not be properly diversified as a result. EQL has the same holdings as the S&P 500 Index, but each company is weighted equally to help you diversify.

    There are two donut charts presented side by side for comparison. The one on the left shows the percentage weighting by market capitalization for the top 100, 101 to 200, 201 to 300, 301 to 400, and 401 to 500 companies in the S&P 500 Index. The chart on the right shows the same breakdown by company size but equal weighted in the Index. For example, the top 100 largest companies represent 69% of the Index when it’s weighted by market capitalization, but they only represent 20% when the Index is equal weighted.

    For the left-hand chart, the top 100 largest companies in the S&P 500 Index market-cap weighted represent 69% of the index. For companies 101-200, they represent 15% of the index. For companies 201 to 300, they represent 9%. For companies 301 to 400, they represent 5%. For companies 401 to 500, they represent 3%. In comparison, the right-hand chart shows that each size 

  • A history of outperformance vs. the S&P 500

    The S&P 500 Equal Weight Index, which EQL tracks, has outperformed the S&P 500 Index based on rolling monthly periods over the past 3, 5 and 10 years. Dating back to inception in 2003, the S&P 500 Equal Weight Index outperformed the S&P 500 Index by 0.89% on an annualized basis. 

    Over the past 3 years, the S&P 500 Equal Weight Index outperformed the S&P 500 Index 57% of the time. This figure rises to 59% over the previous five years and further to 64% over the past decade. Bar charts represent the percent of time S&P 500 Equal Weight Index outperformed the S&P 500 Index. 

    Source: Morningstar Research Inc. as of December 31, 2023. Performance shown in bar chart consists of rolling monthly periods between January 9, 2003 - December 31, 2023. 

    Annualized outperformance for S&P 500 Equal Weight Index vs S&P 500 Index calculated using daily returns since January 8, 2003 when the S&P 500 Equal Weight Index was incepted. 

Frequently asked questions

The following are a few of the most common questions investors ask us about ETFs and how this product can play a role in your long-term investment planning and portfolio.

Invesco is a global leader in smart beta ETFs which are ETFs that follow an alternative weighting strategy when compared to traditional market cap-weighted indexes. EQL for example is a smart beta ETF by offering the S&P 500 through an equally weighted index.

EQL invests in either securities of Invesco S&P 500® Equal Weight ETF (NYSE Arca ticker: RSP) or in securities of U.S.-listed companies in order to replicate the S&P 500® Equal Weight Index which has the same constituents as the capitalization-weighted S&P 500®; however, each company represented in the index is allocated a fixed weight of 0.20% at each quarterly rebalancing of the index.

EQL provides access to the S&P 500 Equal Weight Index unhedged, EQL.F is Canadian dollar hedged and EQL.U is for investors that have US dollars that want to invest in US dollar. 

Invesco is a pioneer in smart beta, creating the first S&P 500 equal weight strategy in Canada. The S&P 500 covers leading-edge companies, while we enable investors to access them through our efficient range of ETFs and mutual funds. The following are potential ways to implement the Invesco S&P 500 Equal Weight Index ETF in your clients’ portfolios:

  • Core: Use at the core to potentially enhance your clients’ core exposure within large-cap growth equity investments.
  • Complement: Complement your existing strategies to increase the possibility of larger returns.

Learn more about this product

Explore the potential benefits of investing in equal weight strategy that provides access to S&P companies in a cost-effective way. Check out the in-depth product details or download the EQL fact sheet today!

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Footnotes

  • 1

    Source: S&P Dow Jones, as of Dec 31 2023.