The Invesco S&P 500 Equal Weight ETF (RSP), which holds about $96.8 billion in assets, has beaten the traditional cap-weighted S&P 500 by more than two percentage points so far this year, data through July 2 shows. The gap reflects a strategy that systematically trims winners and buys laggards—a process that's paid off in a market where mega-cap stocks have lost some of their pull.
How Equal Weight Works
The S&P 500 Equal Weight Index assigns each of its 500 members roughly 0.20% weight, reset at every quarterly rebalance. That's a stark contrast to the cap-weighted version, where the biggest companies dominate. The equal-weight approach gives more exposure to mid-caps and spreads sector bets more evenly, but it also means higher turnover—and potentially higher taxes—than a low-cost cap-weighted fund.
Quarterly Rebalance: Buy Low, Sell High
Every three months, the index resets each stock back to that 0.20% target, adjusted for float and corporate actions. The rebalance forces managers to sell shares of stocks that have risen and buy more of those that have fallen. That built-in contrarian mechanism has helped the equal-weight index outperform when mega-caps stumble.
New Additions: Marvell and Flex
S&P announced on June 5 that Marvell Technology and Flex would join the S&P 500, effective before the open on June 22, coinciding with the quarterly rebalance. Their inclusion shifts the index's composition slightly, though the overall weight of each new member remains near the 0.20% target.
The Trade-Offs
Investors in the equal-weight ETF pay for that diversification. The fund's higher trading volume and rebalancing costs eat into returns compared to a plain-vanilla cap-weighted fund. And when mega-caps are hot, equal weight can lag. But this year, the strategy is winning—at least for now.
