There is near certainty that the Fed is likely to cut rates at its next meeting in September, as inflation has already hit the U.S. central bank’s 2% target.
The market also has bounced back from experiencing some of the worst trading sessions in nearly two years. Despite the past couple weeks, the S&P 500 is back near all-time highs, with Nvidia (NASDAQ: NVDA) helping to lift the index from its drop on Aug. 5.
In evaluating exchange- traded funds (ETFs), it is important to understand the differences of their weighting methods. To lay it out simply, there are three weighting methods for index ETFs: market-cap-weighted, equal-weighted and fundamental indexes.
Market-cap ETFs are typically framed as more stable, as they allocate their investments based on the market capitalization of the companies. Companies with larger market caps receive a greater portion of the ETFs assets. In this type of ETF, larger companies like Microsoft (NASDAQ: MSFT) will have higher weightings compared to the smaller, less recognizable companies within the index.
This can lead to larger companies having a disproportionate impact and a lack of diversification, which could mean missing out on growth opportunities that smaller companies within the index might provide.
On the other hand, an equal-weighted index gives each company the same weight. This gives investors exposure to all that the index holds, which makes it less vulnerable to the whims of the minority large-cap securities.
Equal-weighted ETFs allow diversification, which can provide smaller stocks the opportunity to outperform the larger stocks. This can also reduce the concentration risk of market-cap index ETFs.
In a volatile market, this weighting can be beneficial for investors looking to find more balanced exposure across the board.
But let’s delve even more specifically into one particular equal weight ETF: RSP.
Invesco S&P 500 Equal Weight ETF (RSP) invests at least 90% of its total assets in securities that comprise the S&P 500 Index.
The egalitarian-oriented ETF boasts a year-to-date return of 9.7% and a one-year return of 18.7%.
According to Yahoo Finance, The S&P 500 equal-weighted index, which is less influenced than the cap-weighted S&P by the recent moves in Big Tech, just hit a new record high. The Utilities, Consumer Staples and Health Care sectors are now sitting at 52-week highs.
RSP gives investors the chance to reap the benefits of the upside potential of breakout companies while still maintaining stability from the industry titans within the fund.
Overall, the RSP ETF may be a good choice for investors looking for diversification, but it’s important to carefully consider the risks and potential returns before making any investment decisions.
As always, I’m happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.
