Equal-weighted exchange-traded funds (ETFs) invest equal amounts in businesses irrespective of their market capitalizations. Conversely, a cap-weighted index, allows companies with larger market caps to have a significant impact on the index value. In recent decades, capitalization-weighted indexing has become the dominant methodology.
For example, the S&P 500 is a market-cap-weighted index, and the SPDR® S&P 500 (NYSE:SPY) gives access to this index. Apple (NASDAQ:AAPL), whose market cap is $2.08 trillion, has the highest weighting (5.65%) in SPY, followed by Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). The top 10 stocks comprise about 28% of the fund.
Recent research led by Bernd Hanke of Global Systematic Investors and Aneel Keswani Cass Business School in London, concludes that equal-weighted funds offer greater diversification and typically perform better.
Against that background, here are two equally-weighted ETFs that could appeal to investors who do not want to buy top-heavy funds concentrated in a handful of stocks.
1. Invesco S&P 500 Equal Weight ETF
Current Price: $149.15
52-Week Range: $94.86 - $152.85
Dividend Yield: 1.36%
Expense Ratio: 0.20% per year
The Invesco S&P 500® Equal Weight ETF (NYSE:RSP) is an equal-weighted version of SPY. Since its inception in April 2003, net assets have reached $27.8 billion.
RSP tracks the S&P 500 Equal Weighted Index, which equally weights the stocks in the S&P 500 Index. Both the index and the fund are rebalanced quarterly.
The top 10 stocks comprise close to 2.5% of the fund. Among the leading names are the steelmaker Nucor (NYSE:NUE), railroad and line-haul operator Kansas City Southern (NYSE:KSU), consumer credit reporting agency Equifax (NYSE:EFX), electronic data storage group Seagate Technology (NASDAQ:STX) and package delivery giant United Parcel Service (NYSE:UPS). The giant tech companies, including Apple, MSFT and AMZN, each have a weighting of 0.20%.
In the past 12 months, RSP is up almost 56% and has returned 16.1% year-to-date (YTD). By comparison, SPY is up 40.8% in the past year and 9.9% YTD. Put another way, the size factor has meant that RSP has outperformed SPY in recent months. Both ETFs hit all-time highs in early May.
We believe the fund could be appropriate for most long-term portfolios. Its forward P/E and P/B ratios stand at 20.76 and 3, respectively. A potential decline toward $145 or below would offer better value.
2. SPDR S&P Biotech ETF
Current Price: $127.57
52-Week Range: $97.15 - $174.79
Dividend Yield: 0.26%
Expense Ratio: 0.35% per year
This fund comes from the health space. The SPDR® S&P Biotech ETF (NYSE:XBI) invests in 170 biotechnology stocks. The fund started trading in January 2006, and net assets stand at $6.8 billion.
XBI tracks the S&P Biotechnology Select Industry, which is equal-weighted. Around 9.5% of the fund is in the top 10 companies, whose market caps range from $1.1 billion to $63.5 billion.
Among the top names in its roster: Curis (NASDAQ:CRIS), which concentrates on cancer treatments; United Therapeutics (NASDAQ:UTHR), which focuses is on treatment of chronic and life-threatening conditions; biopharma group Alexion Pharmaceuticals (NASDAQ:ALXN); Moderna (NASDAQ:MRNA), which has developed one of the leading vaccines against COVID-19; and Humanigen (NASDAQ:HGEN), which focuses on rare diseases.
Most analysts concur that the biotechnology sector is innovative. The rush to develop vaccines and treatments for the pandemic is a testament to the growth potential of the industry. In the past 12 months, XBI returned more than 21% and hit an all-time high on Feb. 9. However, YTD, the fund is down 11.2%. We like the diversity of the fund. Potential investors could consider investing in XBI around these levels.
On a final note, by comparison, the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which is a cap-weighted fund, has returned 11% in the past 12 months, but is down almost 2% YTD. It is another widely-followed ETF with close to $10 billion under management.