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 | RSP | GSEW | |
Inception | 5/5/2010 | 4/24/2003 | 9/12/2017 |
Expense Ratio | 0.09% | 0.20% | 0.09% |
AUM | $599.39M | $45.03B | $488.43M |
Avg Daily Volume | $4.90M | $902.65M | $1.94M |
Holdings | 615 | 506 | 496 |
Rebalancing | Quarterly | Quarterly | Monthly |
Turnover | 28.00% | 21.00% | 44.00% |
YTD Price Performance | 11.26% | 7.74% | 11.92% |
5 Year Price Performance | 51.82% | 55.95% | 54.10% |
Dividend Frequency | Quarterly | Quarterly | Quarterly |
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.
EUSA | RSP | GSEW | SPY | |
Price / Earnings TTM | 18.38 | 18.58 | 18.67 | 22.64 |
Price / Book | 2.67 | 2.58 | 2.83 | 4 |
Price / Sales | 1.7 | 1.57 | 1.83 | 2.58 |
Price / Cash Flow | 12.1 | 11.63 | 12.63 | 15.71 |
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.
Ticker | Name | Weight% |
Broadcom Inc. | 0.31 | |
Robinhood Markets, Inc. | 0.22 | |
Bath & Body Works, Inc. | 0.21 | |
Burlington Stores, Inc. | 0.21 | |
Coinbase Global, Inc. | 0.21 | |
UiPath, Inc. | 0.21 | |
DocuSign, Inc. | 0.2 | |
Snap, Inc. | 0.2 | |
Carnival Corp. | 0.19 | |
Ulta Beauty, Inc. | 0.19 |
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.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
EUSA | 314.04% | 11.02% | -39.16% | 0.71 | 16.03% |
RSP | 338.79% | 11.50% | -39.04% | 0.73 | 16.23% |
SPY | 409.80% | 12.74% | -33.72% | 0.87 | 14.72% |
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.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
RSP | 685.26% | 10.54% | -59.92% | 0.55 | 16.94% |
SPY | 631.85% | 10.16% | -55.19% | 0.6 | 14.72% |
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.
For further details see:
EUSA: What Makes It Different From RSP?