HOOD - EUSA: What Makes It Different From RSP?

2023-12-13 11:53:12 ET

Summary

• iShares MSCI USA Equal Weighted ETF is an equal-weight ETF with a portfolio of 610 companies.
• It is well-diversified across sectors and holdings.
• Compared to RSP, EUSA is tilted to mid-caps. RSP is a larger and more liquid fund.
• An equal weight methodology may be more interesting in some sectors than in the broad market.

EUSA strategy and portfolio

iShares MSCI USA Equal Weighted ETF (EUSA) is a passively managed fund tracking the MSCI USA Equal Weighted Index. It started investing operations on 5/5/2010, has a portfolio of 610 companies, a trailing 12-month distribution yield of 1.51% and an expense ratio of 0.09%. Distributions are paid quarterly. It is almost exclusively invested in US companies (over 98% of asset value).

Equal weight ETFs have a few advantages:

• A better diversification across holdings
• A positive bias for Fama-French's size factor
• A "buy low - sell high" pattern embedded in the rebalancing process

They also have drawbacks:

• A higher turnover rate than capital-weighted indexes, resulting in transaction costs and less favorable tax treatment
• A higher volatility in market downturns because smaller, more volatile companies have a higher weight

The closest competitors of EUSA are Invesco S&P 500® Equal Weight ETF (RSP) and Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW). The table below compares some of their characteristics.

EUSA is much smaller and less liquid than RSP, but has a lower expense ratio. It has more holdings than its competitors, showing a tilt to mid-cap companies (about 67% of asset value). It has led to a slightly lower 5-year price return, as market performance has been skewed by mega caps in this time frame. The Goldman Sachs fund GSEW has a monthly rebalancing frequency, resulting in a higher turnover.

As plotted on the next chart, the three funds are very close regarding the sector breakdown, and they are more balanced than the S&P 500 (SPY). Compared to the capital-weighted benchmark, they massively underweight technology and communication. They overweight mostly industrials, real estate, materials and utilities.

They also are very close in valuation, and significantly cheaper than the S&P 500 index, as reported in the next table.

Positions are rebalanced in equal weight every quarter, and they may drift with price action. The next table lists EUSA top 10 holdings as of writing. They represent only 2.15% of assets, so risks related to individual companies are very low.

Performance

Since inception, EUSA has underperformed the S&P 500 by about 1.7% in annualized return. It is close behind RSP: the difference only is 48 bps. Drawdowns and volatility, measured as standard deviation of monthly returns, are similar for the equal-weight funds and show a significantly higher risk than for the capital-weighted benchmark.

Data calculated with Portfolio123

Since GSEW inception (September 2017), EUSA has slightly underperformed its peers, and lags the benchmark by 33% in total return.

On the longer term, the equal-weight methodology has brought a small excess return since RSP inception (04/24/2003), as reported in the next table. Nevertheless, the 20-year risk-adjusted return (measured by Sharpe ratio) stays inferior to the benchmark.

Takeaway

iShares MSCI USA Equal Weighted ETF is a competitor to Invesco S&P 500 Equal Weight ETF and Goldman Sachs Equal Weight U.S. Large Cap Equity ETF. It has a wider exposure to mid cap companies, with about 100 additional holdings. This has been a bit detrimental in a bull market skewed by mega-caps. However, the size effect may become an edge in other market conditions.

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