Earlier this year, the SPDR S&P 500 ETF (SPY) celebrated its 30-year anniversary as the first exchange-traded fund to hit U.S. stock exchanges. But the innovation and growth of the ETF marketplace doesn’t stop there.
This year also marks another less recognized but significant milestone for the ETF industry: the launch of the Invesco S&P 500 Equal Weight ETF, the very first factor investing fund.
Introduced on April 24, 2003, the Invesco fund (whose ticker is RSP) takes a novel approach to investing in the S&P 500. Instead of weighting companies by their market capitalization the way conventional funds would, the Invesco fund assigns an equal 0.20% portfolio weight to each of the 500 stocks within the index.
The fund’s now-overlooked birth started an explosion in factor-linked ETFs. Assets in these funds have ballooned to more than $1 trillion, according to Bloomberg Intelligence. This figure includes both single and multi-factor funds along with ESG products.
“Think of a factor as an attribute with which excess returns are associated,” said Craig Lazzara, managing director at S&P Dow Jones Indices. Lazzara cites the low volatility, price momentum and quality as other examples of factors investors can take advantage of with these strategies.
Besides the fact that they offer the potential for better performance, factor funds like Invesco’s also attract advisors because they can curb risk.
Consider that market-cap-weighted indexes can become top-heavy. For an index-tracking ETF, this means the largest companies within the index have the greatest influence on the fund’s performance and volatility. While portfolio concentration can be good at times, it does increase risk.
Today, the top 10 holdings within the SPDR S&P 500 ETF account for 27.15% of the fund’s equity exposure. Meanwhile, the remaining 72.85% is spread across the other 490 stocks, with the smallest of the S&P 500 companies accounting for less than 5% of equity coverage. The end result is that investors get less exposure to the smaller stocks within that index.
Although the asset growth of factor ETFs has been impressive, it still pales in size to that of conventional market-cap index funds.
The Invesco S&P 500 Equal Weight ETF has just $33.37 billion in assets, while the SPDR fund boasts $367.19 billion.
Invesco’s weighting strategy has experienced both periods of outperformance and underperformance. For instance, over the last 10 years, it gained only 183% while the SPDR fund logged 211%. However, during longer stretches, the Invesco equal-weight fund has outperformed—for instance, if you look over the past 20 years, it gained an impressive 621% while the SPDR fund gained only 579%.
Generally speaking, Invesco’s fund will perform better against large market-cap-weight ETFs like the SPDR fund when smaller stocks are in favor and outperforming large caps. Additionally, the Invesco fund’s historical movements are highly correlated with the S&P MidCap 400 index.
How can the Invesco fund be used within client portfolios?
Some advisors use it to diversify away from market-cap-weighted strategies or to replace high-fee underperforming active strategies. Others use it as the growth component of a portfolio.
In the end, the ETF industry owes some of its success to funds like the Invesco S&P 500 Equal Weight ETF. It’s been a genuine trailblazer by leading the way for alternative methods of weighting stocks within a portfolio.
While factor investing has come a long way since the Invesco fund’s debut, it’s a strategy that can get complicated. Thankfully, the fund has kept things simple. Its long track record, coupled with its easy-to-understand strategy, makes it an easy investment to explain to clients.