One of the most common and best pieces of investment advice is to invest in a low-cost S&P 500 index fund. These funds allow investors to participate in the long-term growth of the economy by purchasing a diversified basket of stocks at a low cost.
But recently some investors have raised concerns about the increased concentration of market indexes like the S&P 500. The S&P 500 is a market-cap weighted index, which means the highest- valued companies make up the largest weights in the index. Due to the strong performance of a handful of large tech companies such as Apple and Microsoft, just seven stocks account for nearly 30 percent of the S&P 500, as of April 2024.
Equal-weight index funds are a way to combat this concentration risk. Equal-weight funds hold an equal proportion of each stock that makes up an index, which translates into a roughly 0.2 percent holding for each company in the S&P 500, for example.
Here are some of the top equal-weight index funds to consider for your portfolio.
What are equal-weight index funds?
Equal-weight index funds hold the stocks that make up a particular index in equal weights, rather than their corresponding index weights. For example, Microsoft (MSFT) is the largest company in the S&P 500 based on market value, as of April 2024. Microsoft accounted for 7.08 percent of the S&P 500.
However, in an equal-weight S&P 500 index fund, Microsoft would account for just 0.2 percent of the fund, the same weighting as the other roughly 500 stocks in the fund because each holding is in equal proportion.
Investors may choose to buy an equal-weight fund as a way to reduce their exposure to the largest companies or boost their positions in smaller stocks in the index. If you’re concerned about the level of concentration in the S&P 500, equal-weight funds are a way to manage that risk.
Top equal-weight index funds
*Fund data as of May 9, 2024.
Invesco S&P 500 Equal Weight ETF (RSP)
The Invesco S&P 500 Equal Weight ETF tracks an equal weight S&P 500 index and is rebalanced quarterly. The fund increases exposure to smaller companies and reduces concentration risk, relative to market-cap weighted indexes.
- 5-year returns (annualized): 11.2 percent
- Expense ratio: 0.20 percent
- Assets under management: $55.4 billion
- Dividend yield: 1.8 percent
Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW)
The Goldman Sachs Equal Weight U.S. Large Cap Equity ETF tracks an index that equal weights the largest U.S. stocks and is rebalanced monthly. The fund aims to benefit from a broad range of market environments and reduce exposure to “isolated market incidents.”
- 5-year returns (annualized): 10.9 percent
- Expense ratio: 0.09 percent
- Assets under management: $687.4 million
- Dividend yield: 1.6 percent
Invesco Russell 1000 Equal Weight ETF (EQAL)
The Invesco Russell 1000 Equal Weight ETF is based on the Russell 1000 Equal Weight Index and is rebalanced quarterly. The fund is equally weighted across 11 sectors and each holding is equally weighted within each sector.
- 5-year returns (annualized): 8.9 percent
- Expense ratio: 0.20 percent
- Assets under management: $594.5 million
- Dividend yield: 1.9 percent
Direxion Nasdaq-100 Equal Weighted Index Shares (QQQE)
The Direxion Nasdaq-100 Equal Weighted Index Shares aims to track the performance of the Nasdaq-100 Equal Weight Index. The Nasdaq 100 includes 100 of the largest non-financial companies listed on the Nasdaq. Initial weightings are set at one percent and rebalanced quarterly.
- 5-year returns (annualized): 13.6 percent
- Expense ratio: 0.35 percent
- Assets under management: $1.2 billion
- Dividend yield: 0.9 percent
iShares MSCI USA Equal Weighted ETF (EUSA)
The iShares MSCI USA Equal Weighted ETF aims to track the performance of an equal weighted index of U.S. stocks. The fund offers more exposure to mid-cap stocks and reduces the bias toward the largest companies. More than 600 stocks are held in the fund.
- 5-year returns (annualized): 10.5 percent
- Expense ratio: 0.09 percent
- Assets under management: $733.1 million
- Dividend yield: 1.5 percent
First Trust Dow 30 Equal Weight ETF (EDOW)
The First Trust Dow 30 Equal Weight ETF aims to track the performance of the Dow Jones Industrial Average Equal Weight Index. The fund holds the 30 stocks that comprise the Dow, but holds them in equal weights, whereas the Dow is price-weighted, meaning the highest priced stocks account for the largest percentage of the index.
- 5-year returns (annualized): 9.3 percent
- Expense ratio: 0.50 percent
- Assets under management: $231.7 million
- Dividend yield: 1.9 percent
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
Read the full article here
