If the Market Rally Stalls, This ETF Can Insulate Portfolios

Key Points

• The Invesco S&P 500 Equal Weight ETF uses quarterly rebalancing to reduce concentration risk, limiting technology exposure to 19% versus nearly 38% for the SPY.
• RSP carries a beta of 0.92, making it nearly 9% less volatile than the broad market, and it lost less than SPY during the year's earlier selloff.
• Since 1990, the equal-weight index has outperformed the cap-weighted S&P 500 by an annual average of 1% to 1.05%, and RSP's dividend yield of 1.50% exceeds SPY's 0.98%.

After losing nearly 8% through the first three months of the year, the S&P 500 Index has rallied on a renewed AI trade and increasingly bullish investor sentiment. Large- and mega-cap U.S. equities have seen a surge in inflows, helping push the benchmark index up more than 18% since the start of Q2.

Despite the recent turnaround, uncertainty persists. Much of the rally is tied to mega-cap companies benefiting from the memory chip shortage, leaving investors wondering how long the S&P 500’s rally can last. Add in an expanding $1 trillion market cap club and looming initial public offerings (IPOs) from companies like SpaceX and OpenAI, and concentration risk is becoming an increasingly pressing threat to investors’ portfolios.

However, equal-weight exchange-traded funds (ETFs) tracking the major indices are having a moment—especially the Invesco S&P 500 Equal Weight ETF NYSEARCA: RSP, which recently hit its all-time high.

For conservative investors looking to circumvent a potential pullback or stalled rally, here’s how the RSP can help you hedge against the S&P 500’s tech-heavy weightings and their inherent volatility.

The Equal Opportunity Fund for All of the S&P 500 Companies

Given its current weightings, the S&P 500’s 10 largest companies account for around 40% of the index.

For ETFs using the index as their benchmark, that means 40 cents out of every $1 invested goes to those stocks, with the remaining 60 cents spread across the other 493 stocks. And that’s before the rumored $1.75 billion SpaceX IPO adds another layer of concentration risk.

On the other hand, the RSP utilizes quarterly rebalancing to maintain its equal-weight stance. That means a stock like Micron NASDAQ: MU—a more than $1 trillion market cap company with a nearly 840% one-year gain—receives the same treatment as little-known Corning NYSE: GLW, a $164 billion market cap company, and its nearly 280% one-year gain.

Because of that quarterly rebalancing objective, the fund’s portfolio is more evenly—but not equally—balanced between the S&P 500’s 11 sectors.

Technology, which accounts for approximately 35% of the index’s companies, still represents the largest allocation at more than 19% of the fund. For context, the market-cap weighted SPDR S&P 500 ETF Trust NYSEARCA: SPY allocates nearly 38% of its portfolio to technology.

After technology, RSP’s top sector allocations are financials at 15.6%, industrials at 13.9%, healthcare at 10.9%, and consumer discretionary at 9.4%.

But perhaps more emblematic of the Invesco S&P 500 Equal Weight ETF’s strategy is a closer look at its industry breakdown.

At 5.6%, utilities receive a larger position in the RSP’s portfolio than semiconductors, oil, and gas—each of which have played enormous roles in the S&P 500’s Q2 rally and are looking overextended as a result. If the index’s current run stalls even momentarily or experiences a pullback, which it is arguably overdue for, the equal-weight alternatives are better-suited to insulate investors’ portfolios from the ensuing fallout.

Equal Weight Equals Lower Volatility

Upside potential is capped for equal-weight ETFs like the RSP when compared to its market-cap-weighted counterparts. The SPY, for instance, has seen its shares gain about 10% so far this year, while the RSP is up a little more than 8%—respectable, but still lagging.

But gains are not the primary objective when investing in equal-weight funds—security is. And the RSP’s equal-weight approach directly translates to lower volatility. The ETF currently carries a beta of 0.92, meaning it is nearly 9% less volatile than the broad market as measured by the S&P 500, whose beta serves as the benchmark at 1. By comparison, Micron’s beta currently stands at 1.91, indicating its stock is nearly twice as volatile as the overall market.

That was on full display earlier this year when the SPY fell more than 9% from its then-year-to-date (YTD) high on Jan. 27 to its YTD low on March 30. Meanwhile, the RSP was better-equipped to endure the S&P 500’s selloff earlier this year, not reaching its then-YTD high until Feb. 27—a full month after the market-cap weighted SPY—and losing just over 8% before hitting its YTD low on March 30.

Performance and Yield That Help You Sleep at Night

In the short term, the difference in gains and losses between the RSP and market–cap–weighted funds may seem marginal. But over time, they make a sizable difference.

According to Invesco, since 1990, the equal-weight index has outperformed the weighted S&P 500 by an annual average of 1% to 1.05% through the early 2020s. That translates to a gain of more than 32% while protecting investors from downside risk over that multi-decade timeframe.

Furthermore, the RSP’s dividend yields 1.50%, or $3.11 per share annually at the fund’s current share price. The SPY’s dividend yields just 0.98%, or $7.38 per share annually at the fund’s current share price.

Based on 719 analyst ratings of the companies in the Invesco S&P 500 Equal Weight ETF’s holdings over the past year, the fund has a Moderate Buy rating, with more than 61% of shares held by institutional owners.