2023-12-26 17:43:51 ET
Summary
- The Invesco S&P 500® Equal Weight Technology ETF is recommended for investment due to its equal weight on technology stocks and ability to rebalance towards companies with favorable valuations.
- The RSPT ETF outperforms both the S&P 500 index and non-IT sector focused, equal weighted ETFs, but is outperformed by cap-weighted ETFs like VGT.
- RSPT holds promising lower weight stocks such as First Solar, NXP Semiconductors, and Microchip Technology, which have attractive valuations and strong profitability.
Investment Thesis
Invesco S&P 500® Equal Weight Technology ETF ( RSPT ) warrants a buy rating due to its equal weight on technology stocks versus cap weight and ability to rebalance towards companies with more favorable valuations looking forward. While mega-cap technology stocks have led the way in 2023, history has shown that evenly distributed weights could provide optimal returns for investors, particularly following strong market run-ups.
Fund Overview and Compared ETFs
RSPT is an exchange-traded fund, or ETF, that equally weighs information technology sector stocks in the S&P 500 index (SP500). With an inception in 2006, the fund has 66 holdings and $3.55B in assets under management, or AUM. RSPT holds 100% weight in the information technology sector and rebalances its holdings quarterly to maintain equal weight.
The strategy of RSPT differs greatly from other ETFs used for comparison purposes. For example, Vanguard’s Information Technology Index Fund ( VGT ), is cap weighted with heavy holdings in Microsoft ( MSFT ) and Apple ( AAPL ). Additionally, Direxion NASDAQ-100 Equal Weighted Index Shares ETF ( QQQE ) is used for comparison as another equally weighted ETF. Finally, the SPDR® S&P 500 ETF Trust ( SPY ) is also utilized as a comparison with the total “market.”
Performance, Expense Ratio, and Dividend Yield
RSPT has a 10-year CAGR of 16.83%. QQQE, another equal weighted ETF not focused on the IT sector, has a 10-year CAGR of 13.01%. This can be predominantly explained by the IT sector’s strong YTD performance, which is up over 50%, as measured by the S&P 500 Information Technology Sector Index.
VGT, a cap-weighted ETF mostly focused on big tech , has a 10-year CAGR of 19.60% and has done well YTD, buoyed by “magnificent seven” stocks including MSFT and AAPL. For comparison, the S&P 500 index’s 10-year CAGR is at approximately 12%, lower than all ETFs examined. Therefore, RSPT traditionally outperforms both the S&P 500 index as well as non-IT sector focused, equal weighted ETFs. However, VGT, with its cap weighted strategy, has outperformed all ETFs examined over the past few years.
10-Year Price Return for RSPT and Compared ETFs (Seeking Alpha)
Investors considering RSPT will find a relatively low expense ratio at 0.40%, but not quite as low as the other ETFs compared, such as QQQE or VGT. Not surprisingly, the dividend yield for technology ETFs is relatively low. RSPT also has a low dividend yield at 0.56% with a 5-year dividend yield CAGR of 5.82%. This dividend yield is lower than the S&P 500 index as well as QQQE and VGT.
Expense Ratio, AUM, and Dividend Yield Comparison
RSPT | QQQE | VGT | |
Expense Ratio | 0.40% | 0.35% | 0.10% |
AUM | $3.55B | $1.08B | $67.14B |
Dividend Yield TTM | 0.56% | 0.80% | 0.65% |
Dividend Growth 5 YR CAGR | 5.82% | 15.66% | 7.71% |
Source: Seeking Alpha, 24 Dec 23.
RSPT Holdings and Its Competitive Advantage
RSPT has mega and large cap stocks within its holdings including MSFT, AAPL, and Broadcom ( AVGO ). These holdings simply hold lower weight than a cap-weighted ETF. Because RSPT rebalances quarterly, some holdings listed below are heavier since they have grown since the last rebalance. VGT, in contrast, has similar information technology stocks but because of its cap-weighted strategy has a heavier weight on mega-cap stocks.
Top 10 Holdings for RSPT and Compared ETFs
RSPT – 66 holdings | QQQE – 102 holdings | VGT – 315 holdings |
ENPH – 1.91% | CTAS – 1.05% | AAPL – 22.23% |
ANSS – 1.83% | MU – 1.04% | MSFT – 20.88% |
AVGO – 1.74% | WBA – 1.03% | NVDA – 4.16% |
FSLR – 1.72% | ODFL – 1.03% | AVGO – 3.36% |
TER – 1.71% | LULU – 1.03% | ADBE – 2.27% |
MU – 1.69% | ADBE – 1.02% | CRM – 2.01% |
ZBRA – 1.67% | AMZN – 1.02% | CAN – 1.71% |
FTNT – 1.67% | AZN – 1.02% | CSCO – 1.61% |
INTC – 1.65% | ANSS – 1.02% | AMD – 1.61% |
TRMB – 1.64% | BIIB – 1.02% | ORCL – 1.57% |
Source: Multiple, compiled by author on 24 Dec 23.
All ETF investors know that the future performance of the fund is tied to the performance of its individual holdings. Multiple of RSPT’s holdings demonstrate strong potential, including First Solar Inc. ( FSLR ), NXP Semiconductor N.V. ( NXPI ), and Microchip Technology Incorporated ( MCHP ). These stocks are relatively undervalued in comparison to big tech stocks heavily weighted in a cap-weighted fund.
Valuation of Mega-Cap Stocks
Cap-weighted ETFs like VGT have heavy holdings in big tech stocks like MSFT, AAPL, Nvidia ( NVDA ), and Meta Platforms ( META ). All these companies have had huge run-ups, far outpacing the S&P 500 index, as shown below. Even AAPL, with the lowest YTD returns of the “magnificent seven,” sees unfavorable valuation metrics currently. AAPL has a forward price/book ratio 856% higher than its sector median and 26% higher than its own 5-year average.
Year-to-Date Price Return for "Magnificent Seven" (Seeking Alpha)
Therefore, while these mega-cap stocks will likely do well in the future, their year-to-date rise gives reason to believe that their returns next year could be muted. To diversify away from these big tech stocks while still focusing on the technology sector, one could utilize RSPT to include an equally weighted blend.
The Importance of Equal Weight
An alternative to investing in cap-weighted funds is to add equal-weighted ETFs to a portfolio. To understand the potential of an equal-weighted strategy, one can look at the Invesco S&P 500 Equal Weight ETF ( RSP ) versus SPDR S&P 500 ETF Trust ( SPY ). Between January 2004 to December 2023, RSP, an equal-weighted fund, outperformed the cap-weighted ETF.
SPY vs. RSP Price Return: 2004-2023 (Seeking Alpha)
Looking forward, the performance of RSPT, compared to cap-weighted funds, will be dependent on the returns for its smaller cap companies that have a relatively heavier weight with RSPT. I will cover three examples of these smaller cap companies below. In addition to the growth of these smaller cap companies, any correction seen with the “magnificent seven” will have a reduced effect with RSPT due to its lower weight for each of them.
Multiple Promising Lower Weight Stocks
Now that we have looked at the importance of including equally weighted funds, we can note that RSPT has several lower weight holdings that could propel the ETF. The first is First Solar. The American solar tech company has a forward P/E GAAP 23.7% lower than its sector median. Additionally, the company demonstrated a 25.3% YoY revenue growth and 15% net income margin.
The second is NXP Semiconductors N.V., which has 1.56% weight with RSPT with only 0.45% weight with VGT due to its smaller capitalization. NXPI has a forward P/E GAAP 28% lower than this its sector median while demonstrating strong profitability including a 21% net income margin and 26% return on common equity.
Finally, the third is Microchip Technology Incorporated. The company has an attractive valuation with a forward P/E GAAP 16% below its sector median while achieving a 17% YoY revenue growth and 67% gross profit margin. Because RSPT is an equal weight fund, it holds 1.56% weight on MCHP while VGT holds less than 0.5%.
Valuation and Risks to Investors
RSPT is currently trading at $32.80 at the time of writing this article. This is essentially at the upper limit of its 52-week range and all-time high price of $32.81. In comparison, VGT, a cap-weighted tech ETF is also near the upper limit of its 52-week range and all-time high. Because of the strong performance of mega-cap stocks, particularly the “magnificent seven”, VGT has seen a YTD return that solidly outperforms equal-weighted RSPT.
RSPT and Compared ETF YTD Returns (Seeking Alpha)
The strong YTD performance for VGT may also be its shortcoming. VGT, a cap-weighted ETF is arguably overvalued at a 32.9 P/E ratio, compared to RSPT’s 21.1 P/E ratio. “Magnificent seven” stocks make up nearly 50% of the total weight of VGT. Therefore, the big tech stocks that have undesirable valuation characteristics cause VGT to be bloated.
Valuation Metrics for RSPT and Peer Competitors
RSPT | QQQE | VGT | |
P/E ratio | 21.10 | 28.80 | 32.9 |
P/B ratio | 4.54 | 9.65 | 8.0 |
Source: Compiled by Author from Multiple Sources, 24 Dec 23.
History has shown that an equal weighted strategy typically outperforms a cap weighted strategy following a strong run-up. This is because the large and mega cap stocks see tremendous gains driving their valuations up. Given the S&P 500’s over 20% rise this year and the current valuations of mega-cap stocks, I argue that we are exactly in that scenario when lower cap stocks are more favorable.
Despite its broad diversification with equal weights, RSPT is not without risk. However, its typical risk level is lower than that of a cap-weighted ETF. For example, VGT has a beta value of 1.21 compared to the Dow Jones U.S. Total Market Index and a standard deviation of 25.16%. RSPT, by comparison, is slightly lower with a beta of 1.17 and standard deviation of 23.97%. Therefore, investors can expect slightly less volatility with RSPT compared to cap-weighted VGT.
Concluding Summary
RSPT is an ETF that warrants a buy rating due to its equal-weighted strategy in the information technology sector. Mega-cap stocks that make up the “magnificent seven” have seen tremendous gains this year including NVDA (241%) and META (183%). However, this has resulted in less than favorable valuation metrics for these big tech stocks. As an alternative, investors should consider an equal-weighted IT ETF, such as RSPT. This investing approach will allow for increased weight diversification to smaller tech stocks with more favorable valuations currently.
For further details see:
RSPT: How An Equal-Weighted ETF Can Outperform In The IT Sector