Equal Weight Investing

How many of the Smallest Stocks in the S&P 500 Index does it take to equal the Largest Stock?

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Source: FactSet Research Systems, Inc., as of Dec. 31, 2017.

The equal weight advantage

Equal weight investing is a smart beta strategy that does exactly what its name implies—it simply weights every stock in a portfolio equally, regardless of how small or large it is. Equal weight investing is very different from the traditional cap-weighted method—where each stock is weighted based on its size (or market capitalization). Cap-weighting often favors the largest stocks in the strategy, which results in the performance of few dominating the rest and increasing concentration risk.

Investors who want to invest in a broad market index, but don't want their investment to be dependent on the performance of a few large companies, may find an equal weight strategy to be an attractive choice. It's important to note that while equal weighting reduces single-stock concentration, some indices may still be concentrated in specific market segments.

Equal weight investing is a straightforward methodology that treats every stock in a portfolio equally, regardless of market capitalization. This simple approach creates unbiased exposure to all stocks and can be applied to broad market indices, such as the S&P 500 Index, as well as to sectors.

Source: FactSet Research Systems, Inc., as of Dec. 31, 2017.

Excess return potential

Since inception, the S&P 500 Equal Weight Index has outperformed the cap-weighted S&P 500. Excess return potential is derived from a combination of balanced exposure and a disciplined quarterly rebalance. .

Growth of $10,000 (Feb. 28, 2003 - Dec. 31, 2017)

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Source: Bloomberg L.P., as of Dec. 31, 2017. Past performance does not guarantee future results. An investment cannot be made directly into an index. Index returns do not represent fund returns.

Performance statistics - Market-cap vs. equal weighting 2003-2017

  Cumul. Return Avg. Ann. Return Ann. Std. Dev Ann. Semi-Dev Sharpe Ratio Sortino Ratio
S&P 500 Equal Weight Index 478.23% 12.55% 15.82% 17.12% 0.72 0.66
S&P 500 Index 330.91% 10.34% 13.29% 15.64% 0.69 0.59

Source: FactSet Research, Inc., February 2003 to December 2017. Returns are the monthly frequency.

Balanced exposure

Equally weighting all stocks in a portfolio is a simple yet effective way to mitigate the overconcentration risk inherent in cap-weighted portfolios. Investors who want to invest in a broad market index, but don't want their investment to be dependent on the performance of a few large companies, may find an equal weight strategy to be an attractive choice.

Consider that over the last 10 years, the smallest 450+ stocks in the S&P 500 Equal Weight Index not only outperformed the same stocks in the cap-weighted S&P 500, they beat the entire S&P 500 Index's return by 19%.

10-year cumulative total return S&P 500 Equal Weight vs. S&P 500 Index

Equal weight investing reduces the dominance that a few large stocks can have on overall performance.

Source: FactSet Research, Inc. as of Dec. 31, 2017. Past performance does not guarantee future results. An investment cannot be made directly into an index. Index returns do not represent fund returns.

Disciplined rebalancing

Regularly rebalancing a portfolio to its equal weight status results in a buy/low sell high effect over time, as overvalued stocks are sold and undervalued stocks are bought. Systematic rebalancing has been an important contributor to equal weight strategies' historical outperformance versus cap-weighted strategies.

Performance attribution of S&P 500 Equal Weight Index (April 24, 2003 to Dec. 31, 2017)

The majority of S&P 500 equal weight outperformance versus the S&P 500 Index (cap weight) can be attributed to disciplined quarterly rebalancing.

Rebalancing: Equal weight exposure is maintained through quarterly rebalancing, which creates, as a byproduct over time, a buy low/sell high effect.

Sector allocation: More consistent exposure to sectors over time contributes to potential outperformance.

Source: FactSet Research, Inc. as of Dec. 31, 2017. Past performance does not guarantee future results. An investment cannot be made directly into an index. Index returns do not represent fund returns.

Historical outperformance

Introduced in 2003, the PowerShares S&P 500 Equal Weight Portfolio (RSP) was the industry's first smart beta ETF. RSP equally weights each stock in the S&P 500, ensuring all names within the index have the same opportunity to influence fund returns. Balanced exposure combined with a systematic quarterly rebalance has helped RSP to historically outperform the cap-weighted S&P 500. Over time, regularly rebalancing a portfolio to its equal weight status results in a buy/low sell high effect as the strategy sells overvalued stocks and buys those that are undervalued.

Average Annualized Rolling Return
For Rolling Monthly Periods (NAV Performance)

% of Time RSP Outperforms S&P 500 Index

Source: FactSet Research, Inc. as of Dec. 31, 2017. The fund's total expense ratio is 0.20%. Performance is at NAV. Click here for standardized performance. Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. Performance data quoted represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data quoted. After-tax returns reflect the highest federal income tax rate but exclude state and local taxes. Fund performance reflects applicable fee waivers, absent which, performance data quoted would have been lower. After Tax Held and After Tax Sold are based on NAV. Returns less than one year are cumulative.
As the result of a reorganization on April 6, 2018, the returns presented reflect performance of the Guggenheim predecessor fund. Invesco is not affiliated with Guggenheim.

Contact us

RSP offers a simple, straightforward methodology and dynamic alternative to traditional core holding and cap-weighted strategies. Contact us to learn more about RSP or other products in our suite of equal weight ETFs.



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Risks & other information

Beta is a measure of risk representing how a security is expected to respond to general market movements.

Smart Beta represents an alternative and selection index based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both in active or passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.

Cumulative return is the aggregate amount an investment has gained or lost over time.

The average annual return is the annual geometric mean using the cumulative return.

Standard deviation measures a portfolio's range of total returns and identifies the spread of a portfolio's short-term fluctuations.

Semi-deviation is the square root of the average squared negative deviation from the mean.

Sharpe ratio is the ratio of the annualized average return to its standard deviation.

Sortino ratio is the ratio of the average return to the semi-deviation.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund's return may not match the return of the underlying index. The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the fund.

Investments focused in a particular sector, such as consumer discretionary, financials, health care, industrials and information technology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The fund is non-diversified and may experience greater volatility than a more diversified investment.

Investing in securities of large-cap companies may involve less risk than is customarily associated with investing in stocks of smaller companies.

S&P 500 Equal Weight Index is an equal weight version of the S&P 500 Index.