ETF Battles: Do Equal Weight S&P 500 Funds Offer Any Investment Upside?

Equal weighting a stock portfolio has gotten some attention, especially with the dominance of MAG7 stocks over popular benchmarks like the S&P 500. Simply put, equal weighting is for investors who want to counterbalance the topheavy approach of traditional market cap weighted indexes. Today's ETF contest is between three equal weight ETFs from Invesco. So, which is the best choice? Find out right after this.

I'm Ronda Legy and you're watching ETF Battles, an original episode series that's now in season 6 and we're glad you joined us. Our goal, of course, is to help you make better investment choices. So, if you need help analyzing or breaking down any particular ETFs versus each other, hit us up in the comment section below with your ETF ticker symbols or on our X feed at ETF guide.

I want you also to visit the description section below for links to our viewer resources along with links to our program judges. Get in touch. We've also got links to our program sponsor direction. And besides leverage and inverse choices on broad market indexes, there's lots of choices for industry sectors as well as single stocks like Apple and Tesla. So, be sure to visit direction.com and hit that description section below. Lots of good stuff.

Today's triple header ETF contest was requested to us by a viewer named Nate Dalton. It's between ETF ticker symbols EQWL versus EQAL versus RSP. All are from Invesco. Judging today's contest are two of the best minds in the ETF market. We got Mike Akens at ETF Action and Tony Dong, an independent ETF analyst whose work can be seen at ETF Central among other places.

Judges, great to see you again. Good to be back. Great to be here, Ron. Thanks for having me. So we have our four battle categories: cost, exposure, strategy, performance, and then mystery.

Of course, mystery is where you, our judges, can pick any factor or thing you feel is pertinent to today's contest. Our judges can also nominate wildcard ETFs if they feel there's better choices elsewhere. I've got the scorekeeping chores, and at the end of the program, we will declare an overall winner. Keep in mind, none of the battle outcomes are ever predetermined or known in advance by myself or our judges. So let's start with the first category, cost. Mike, please get us started.

Yeah, I mean, so cost on these three strategies are pretty similar. You've got 20 basis points for RSP and EQAL, then 25 basis points for EQWL. But RSP is the granddaddy of them when it comes to equal weighting. It's been around for years. As a result, it's very large, extremely liquid. From that perspective, if you're looking to trade in and out of this strategy, it's just going to be much cheaper from a spreads perspective and execution perspective. So, I'm going to give the nod to RSP. Though, as we'll see as we go through this battle, I think there's a lot of other factors larger than the five basis points difference here on expense ratio that the investor should be looking at. Strong start. Thank you, Mike. Tony, you're up next. How do you see it when it comes to cost?

Yeah, Mike covers it very succinely. Just from a pure numbers perspective, RSP is going to be cheaper to own long-term and if you're jumping in and out of equal weight S&P 500 for whatever reason, it's going to cost you at least to do it with this ETF. All right, that takes us next to exposure strategy. Tony, you're still up. So give us your analysis.

These all weight the stocks equally, but their selection universe differs. So RSP easiest to understand. You have the S&P 500, and viewers got to know that this index isn't just purely objective. There's a committee process. They also look at earnings. They look at prominence and liquidity. So, it's not as numbers based as you would believe. There's a bit of an active element.

EQWL is a really interesting one. Not many people trade the S&P 100 anymore. Back then, people used to trade OEX contracts and stuff, but not really anymore. So, this is pretty much the 100 most notable companies. Again, not the largest. S&P has that kind of discretion.

And then you have well Equal or EQA. And with the Russell 1000, that is a very broad universe and includes a lot more midcaps. My preference with equal weight is I prefer to have not too many securities. When you have a thousand different stocks all reconstituting and rebalancing it, there's a bit of a drag there. And if you're going to equal weight a thousand companies, what what's going to happen is you're going to have a lot more mid and small caps being over represented. and that could throw off your sector allocations and also change your risk and return profile for so for exposure I really do like EQwo better if I'm going to equal weight anything and understanding this isn't a methodology that I like I'm just going to keep it to 100 mega cap and large cap stocks for simplicity Mike you're up next how do you see it when it comes to exposure strategy Tony gave us good overview I would make one note on EQA it's actually goes one step further it's not just purely equally to the stock first thing it does is that equal weights the sectors.

So it's going to take those 11 gig sectors and go equal there and then equal weight of the stocks across that. So if a sector has a smaller number of stocks, it's going to have a larger weighting to those securities within that sector than it would to the rest of the portfolio that has a sector that has a lot more stocks because it's going to if you equal weight within those more stocks, smaller percentage. So just kind of an added twist to that.

Don't love it either. As Tony mentioned, it's a whole lot going on inside of that portfolio. I don't mind the equal sector weight. I actually think that's pretty novel and can provide some smooth out your returns across different economic cycles, but not equally weighting the stocks in between. There's a lot lot going on there.

So you look at RSP. I think of RSP as a mean reversion strategy. Always has been. RSP is going to have a little higher volatility. Historically, it's added a little bit more return. You know what's interesting about EQ EQWL? If you really want to keep kind of that high quality exposure, but you don't want the if you're trying to get away from the Mag 7, EQWL is a great way to do it because it's still going to be large cap. What I mean by that, the exposure side of this is very unique. EQWL, 94% of the weighted average of the companies inside of it are large cap companies. RSP looks like a midcap strategy. over 50% of the companies are in the midcap category and EQAL because of that thousand stock universe actually looks much more like a like a small cap indices.

So you could almost compare these to different benchmarks from that perspective with EQwl having a weighted average market cap of 367 billion 103 billion for RSP and 52 billion for EQAL. So huge difference there. And when we get into the return section, that is what's driving your difference in returns. Wrap that all up. I still like RSP to complement a portfolio. get a little bit of that u mean reversion, take on a little bit more risk for your people that are looking to potentially outperform over time. have a little longer market cycle. EQWL. If your goal is to get away from the mag 7, I would pick that. Otherwise, just as a pure strategy, long-term, I'm taking RSP. That takes us next to performance. Mike, you're still up. So, how do these three ETFs compare?

Yeah, so on performance perspective, it's pretty wide, pretty wide range of returns we've got going on. So just over the past year, as an example, EQWL was up 13.5% as of last night. RSP 7% and EQAL 8%. The big difference there for EQ WL leading is that mega cap the the higher market capitalization of that portfolio. EQAL got a little bit of benefit from that equal sector weight.

But if you extend out further pretty much very similar returns over five fiveyear period 10-year period EQWL is going to be the clear winner. And again you think back 10 years what has driven this market? meggaap tech companies have driven it. So just from a peer structure perspective, it's had a it's had a better opportunity set. I think looking forward if I were going to compare these 10 years from now or 20 years from now, I think RSP is going to continue to probably provide a little bit more alpha than the other three.

I don't think of any of these as pure core plays in your portfolio. So EQWL I think could be a great solution to reduce MAG 7 but keep that large cap exposure. So I'll keep saying that throughout but as a pure performance predictor I'm going RSP again on this category. Thank you Mike. Tony you're up next on performance. How do you see it?

Yeah historically from December 2014 to present EQwo has outperformed and that's just a natural consequence of what it holds. You have basically the 100 largest stocks with some caveats equally weighted. So every quarter, you know, the the underperformers get brought up to weight, the top performers get trimmed a bit, and it's actually even outperformed the S&P 500, but you know, result of concentration. You know, from a risk perspective, historically, their volatility is pretty similar. EQL does have the lowest one, but that's something you'd expect given that it leans towards mega caps and also has the lowest draw down.

So I I do agree with Mike that in the future if you're going to bet on any one of these pulling ahead perhaps as part of a mean reversion strategy RSP is going to be it. I always have an eye on risk like I'm very much concerned with volatility and draw downs. So you know weighing performance against that for a composite measure I would still prefer EQWL when it comes to betting on performance. Next up is the mystery battle category.