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.

Uh, 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, uh, 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.

Now, today's triple header ETF contest was requested to us by a viewer named Nate Dalton. and uh 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 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 BA 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 pretty similar.

Um, you've got 20 basis points for RSP and EQAL, then 25 basis points for EQwl.

Um, but RSP is the granddaddy of them when it comes to equal weighting.

It's been around for years.

Um, as a result, it's very large, extremely liquid.

Um, and 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 uh 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 uh very succinely.

Uh 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, uh 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.

So 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.

Uh 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.

Uh my preference with equal weight is I prefer to have not too many securities.

Um 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 uh over represented. and that could throw off your sector uh allocations and also change your risk and return profile for so for exposure uh 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 stock 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.

Um don't love it either.

Um, as Tony mentioned, it's a whole lot going on inside of that portfolio.

I don't mind the equal sector weight.

Um, I actually think that's pretty novel and can provide some uh smooth out your returns across different economic cycles, but not equally weighting the stocks in between.

There's a lot lot going on there.

Uh, so you look at RSP.

I think of RSP as a mean reversion strategy.

Always has been.

Um, RSP is going to have a little higher volatility.

Historically, it's added a little bit more return.

Um, 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 um thousand stock universe actually looks much more like a um 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.

Um I still like RSP to complement a portfolio.

Uh get a little bit of that u mean reversion, take on a little bit more risk for your um people that are looking to potentially outperform over time.

Um have a little longer market cycle.

EQWL.

If your goal is to um 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.

Um, so just over the past year, as an example, uh, 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 um the the higher market capitalization of that portfolio.

Um EQAL got a little bit of benefit from that equal sector weight.

Um but if you extend out further um pretty much very similar returns over five fiveyear period um 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 um opportunity set.

I think looking forward um 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 um 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 um I'm going RSP uh again on this category.

Thank you Mike.

Tony you're up next on performance.

How do you see it?

Yeah historically from uh 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.

Uh, you know, from a risk perspective, historically, their volatility is pretty similar.

Uh, 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 uh when it comes to betting on performance.

Next up is the mystery battle category.

This is where our judges can give us that single factor or multiple factors that they think are crucial to today's contest.

And Tony, I'm going to ask you, what is your mystery battle category and which of these three ETFs wins it?

For me, it's this thing I have called offensiveness that like I don't like equal weighted ETFs.

I really don't.

I I think there's no economic basis for just giving every single stock in a selection universe the same weight.

It's not based on fundamentals.

Even market cap waiting is better because it's cheaper and at least it's linked to some measure of what's, you know, making the stock price go up.

The market cap increasing as more shares get added, the price goes up.

But for these three ETFs, the least offensive one to me is EQWL.

Because if I'm going to equal weight a basket of companies, I'm just going to pick the one with the hundreds largest.

Cuz if we're already starting off with no economic basis, I might as well just try and limit the damage that it can do to me by avoiding some of the midcaps, avoiding some of the smaller caps, and not casting too wide of a net.

Like EQAO with the Russell 1000 is just there's too much in there.

And even RSP is a little too much for lack of a better word.

I wouldn't call junk because our the S&P 500 has a uh earning screen, but there's just simply too much.

This is a case where, you know, like the added diversification is really diversification.

So, EQWL takes it for me.

You look at it as, okay, you know what, I just want a basket of 100 large cavs.

I'm agnostic as to, you know, what their size is.

Just understanding that as a whole, the entire group is relatively large and stable.

Mike, your battle category for mystery. what is it and which of these three ETFs wins it?

Yeah, I mean I think first just on the equal waiting concept um I do I actually don't have a problem with equal waiting at all.

Um just so I just throw that out there and that is simply is as long as you have some sort of caveat like RSP starts the S&P 500.

The S&P 500 has a number of metrics that are required to be in that index and to stay in that index.

Both size, profitability, a number of metrics the committee puts into that.

And then from a standpoint of capturing mean reversion and participating in the market, you're getting a broader exposure to the economy.

Um, and historically RSP is going to provide a better return stream.

I totally agree with Tony on the EQL EQAL front. you can't start applying equal weight to massive universe sizes um without any sort of precursor to that starting universe.

So in his in his in his theory I totally agree with it but I think equal waiting actually does work a lot for a lot of different strategies whether it's factor strategy dividend strategies equal waiting has historically proven to provide good return streams.

So just want to put that out there for my mystery category.

Um, I I like I think I'm going to take us from EQAL where it does the equal stock waiting.

I'm just going to throw out a mystery ticker for you.

Uh, EQL is a fund that's been around for years.

It's the Alps equal sector weight ETF.

And what it does is it equal weights the 11 gig sectors in the S&P 500.

It's a fund of fund strategy.

So, it just uses the select sector spiders to do that.

I really like that approach. not as you're if you're going to use that approach, you've got to tailor it a little bit with adding other stories to it.

But, you know, the market tends to get crazy like as we've seen with big tech over the last 10 years, you tend to get out of bounds into certain areas of the market.

Um, you know, energy back in the 80s, um, you know, comm services in the early 2000s, there's many examples where the market gets ahead of itself and that equal waiting across sectors.

You still have the market cap waiting at companies.

So, I think um it's something people should be mindful of.

And I I love just being able to bring up the idea that um sectors matter.

There's over a 30% divergence of return year-over-year just of the 11 gig sectors, top and bottom performer on an annualized basis going back decade after decade.

Um so, year after year and so that's a big deal how you approach your portfolio concentration from sectors.

And I think a mystery uh symbol would be EQL.

And thinking about just starting with the foundation of owning all of those sectors on an equal footing before you start tactically overweighting and underweing based on your macro assumptions.

Great idea and thanks for that wildcard ETF.

That's EQL.

And so now we've moved to the part of the program we're going to give our judges a final opportunity to weigh in with their overall battle winner.

So Mike, give it to us.

I like RSP.

I always have.

I probably always will.

Um I like the fact that it starts the S&P 500.

I actually believe in main reversion over time.

Um I believe that you're owning um in a more uh you're owning a lot more mid small caps through that structure even though they're S&P 500 names.

Um once you equal weight it, it becomes more of a total market strategy.

And I think um taking on that extra risk is going to reward you with extra return for full market cycles.

So RSB is my winner. always like the strategy.

Probably always will.

Tony, your final chance to weigh in with your overall winner.

Me, me and Mike completely sit on other ends of this, but like he's probably right.

I just personally can't bring myself to own any of these.

I have owned EQL briefly.

I will mention as a tax loss harings harvesting partner for large cap blend exposure and for that role, it worked out really well.

So, my goal goes to EQWL just for being uh the most useful of the trio, personally.

All right.

Well, our judges have spoken and according to my final battle scorecard, this is going to be a split decision between EQWL and RSP.

Of course, EQWL was Tony's choice.

It got three of his votes in three categories, and he just liked the starting universe, beginning with the S&P 100, which is those biggest of biggest companies. and um he preferred EQwl over all other ETFs.

And of course, as he mentioned, equal waiting is not one of his preferred strategies.

Uh it actually uh gives him, as we say in Italian, diia, an upset stomach.

And uh so he he prefers other strategies over equal waiting.

Mike in this battle kind of almost universally chose RSP as his choice in most of the categories.

Um, and of course, as he disclosed, you're going to get more of a a midcap midcapish kind of experience and exposure with that RSP.

Of course, it is the S&P 500, but that equal waiting gives you that midcapish again experience.

And then, uh, that equal waiting sector ETF was a wild card choice that I thought was interesting that Mike mentioned, check it out.

That's ticker symbol EQL. uh for those of you that want to do this strategy but with industry sectors and uh as Mike had mentioned um a lot of variance in industry sector performance top to bottom.

So EQL uh is one potential solution for uh investors that are looking to uh to to participate but at the same time uh protect themsel against markets that sometimes get too hot where industry sectors become just too big a portion of the overall uh index.

Great job to both of our judges for breaking down today's equal weight contest.

We also want to thank um Nate Dalton, the viewer who recommended and asked for this ETF contest.

Well done both of our judges.

Keep up the good work.

Thanks, Ron.

Awesome.

Thanks.

Well, be sure to visit the description section below.

We've got links to both of our judges.

Get in touch.

We've also got links to our program sponsor direction.

So, don't be a stranger.

So, which ETF battle would you like to see in the next episode?

Hit me up in the comment section below or on our X feed at ETF guide.

I'm Ronda Legy.

Thanks for watching ETF Battles.

We'll see you on the next episode.