2023-09-05 05:29:39 ET
Summary
- Invesco S&P 100 Equal Weight ETF is an equity exchange-traded fund that invests in the largest 100 U.S. stocks.
- EQWL has outperformed the S&P 500 equal-weight peer RSP, with a total return of over 10% in 2023.
- EQWL has attractive valuation levels and a large cap tilt, making it a more appealing option than SPY or RSP.
Thesis
The Invesco S&P 100 Equal Weight ETF ( EQWL ) is an equity exchange traded fund. The fund is based on the S&P 100 Equal Weight Index , and will invest at least 90% of its total assets in the component securities that comprise the Index. Both the fund and the Index are rebalanced quarterly.
As per its literature, the S&P 100 Equal Weight Index:
is the equal-weight version of the S&P 100. The index has the same constituents as the capitalization weighted S&P 100, but each company in the S&P 100 EWI is allocated an equal weight at each rebalance
With the stocks in the S&P 100 tending to be the largest and most established companies in the S&P 500, EQWL represents an equal weighted take on the largest 100 U.S. stocks. EQWL is a lesser known fund, with the equal weighted S&P 500 fund Invesco S&P 500 Equal Weight ETF ( RSP ) being the industry standard.
The trend in 2023 has been that of an outperformance by tech mega-caps, with mid-caps and small-caps taking a back-seat performance wise. We can see the same dynamic in the equal weight space:
EQWL represents an equal weight take on larger stocks since it is focused on the largest 100 constituents in the S&P 500. The fund has thus outperformed the S&P 500 equal weight peer RSP, which only managed a 6.6% total return in 2023 versus over 10% for EQWL.
As a reminder for retail investors, an equal-weighted fund is one where each underlying stock has the same weight in the fund, and thus carries equal importance in the fund's performance. Long term, equal weight funds actually outperform the underlying index:
In the above graph, courtesy of S&P , we can see how the S&P 500 Equal Weighted Index outperforms the S&P 500 on very long time-frames. For the period December 1970 - January 2003, the S&P 500 generated an annualized return of 10.92%, while the S&P 500 Equal Weight Index produced a 12.69% annualized return.
In this article we are going to look at EQWL's composition, its valuation and analytics, and derive an opinion regarding the fund's forward and its attractiveness relative to RSP.
Analytics
- AUM: $0.324 billion.
- Sharpe Ratio: 0.63 (3Y).
- Std. Deviation: 18 (3Y).
- Annualized Volatility: 18.19% (Seeking Alpha)
- Yield: 2.2%.
- Leverage Ratio: 0%.
- Composition: Equities - S&P 100 Equal Weight
- Expense Ratio: 0.35%
Holdings
The ETF contains 101 names in its portfolio:
Holdings (Fund Fact Sheet)
The reason why we are seeing 101 names here rather than 100 is represented by Alphabet (i.e. Google), which has two tranches of shares traded. As described in the thesis section, this is an equal weight ETF, thus each name in the collateral pool represents roughly 1% of the fund:
Individual Securities (Fund Website)
We are seeing figures here slightly higher than 1% because between rebalancing dates the equities which outperform will represent a higher percentage of the fund.
From a sectoral standpoint, Financials represent the largest allocation, followed by Information Technology:
Sector Allocation (Fund Fact Sheet)
To note that regional banks are not part of this fund, and names such as Berkshire Hathaway, Visa and Mastercard are actually bulked in the 'Financials' sector here.
Due to the equal weighting of the collateral, the fund falls in the Morningstar Large Cap - Value box:
Morningstar Allocation (Morningstar)
There is another interesting aspect to note that directly derives from the equal weight built for this fund, and that is the valuation aspect:
Valuation Metrics (Fund Fact Sheet)
Because the vehicle is not overweight tech mega-caps, its P/E ratio is a very manageable 15.73, while the Price/Book ratio is also fairly muted at 2.77. As a reminder, the largest tech mega-caps are now trading with P/E ratios in excess of 30x, which put them in an extremely stretched valuation multiple percentile. Valuations are extremely important when considering long term results. Buying into very high, stretched valuations generally yields very poor long term results.
Historic Performance
The fund has very robust long term total returns, with the annualized performance exceeding 11% on a 10-year lookback:
Furthermore, as we can see from the above graph courtesy of Seeking Alpha, EQWL outperforms RSP on a long term basis as well. The large cap tilt that has worked so well in 2023 helps the fund on longer time-frames as well.
What is next for the fund?
The fund is an equities vehicle. Outside its financial construction which has a large cap tilt, the fund is nonetheless subject to equities returns. If the market overall experiences a risk-off event, EQWL will have the same direction and similar drawdown. In the 2022 bear market for example, the fund had a -22% drawdown.
It is unclear from market participants where exactly we stand in the cycle. Some are arguing for a new structural bull market, whereas others see a recession in 2024, with the current rally representing just another bear market rally.
We are of the opinion that the higher for longer rates environment will eventually take a higher toll on the economy than currently observed, but there is a significant lag effect to take into account. To that end EQWL is not a buy at these levels, but it does represent a much more attractive option than SPY or RSP for us.
Firstly, we have shown in the article how the valuation profile for EQWL is attractive in comparison to SPY, while at the same time the fund has a large cap tilt that RSP does not exhibit. A -5% pullback would be ideal for market participants to start moving into EQWL, a better equity instrument at this stage when compared to SPY or RSP.
Conclusion
EQWL is an equities exchange traded fund. The ETF is based on the S&P 100 Equal Weight Index , and represents a portfolio of roughly 100 stocks, each with a 1% weighting, representing the largest names in the U.S. equity market. As the article discusses, the ETF actually contains 101 stocks due to the fact that Alphabet (i.e. Google) has two classes of equity outstanding.
Given its composition and construction, EQWL is a Large Cap - Value name as per the Morningstar allocation, and the fund benefits from attractive valuation levels. EQWL's holdings P/E ratio is at 15.7x currently versus 19x for the S&P 500. The fund's P/E ratio is lower than the SPY because the large tech mega-caps with overstretched valuations have less of a weighting here.
We like EQWL, its construction and simplicity. However, the fund's returns will be driven by what the overall equity market does. We feel we are already overstretched in terms of returns for 2023. With September a weaker seasonal month, we would like to see a -5% pullback before allocating capital to EQWL, a fund which we prefer over RSP and SPY at this stage of the cycle.
For further details see:
EQWL: A Lesser-Known Equal Weight Fund With A Large Cap Tilt