ETF Overview
Invesco S&P 100 Equal Weight ETF (NYSEARCA:EQWL) owns a portfolio of top 100 stocks that are included in the S&P 500 index. Instead of allocating stocks in its portfolio by market-capitalization, the fund implements an equal-weight strategy and has to rebalances its portfolio quarterly. This means that the fund incurs higher trading expenses than many other funds that follows market-weight strategy. EQWL has lower exposure to growth sectors such as technology sector. In addition, its equal-weight approach limits the fund to fully capture the benefits of growth in many technology stocks in its portfolio. Given that technology sector will likely be a strong performance driver of the S&P 500 and S&P 100 indices in the future, EQWL will likely underperform against these indices. Hence, we think investors should consider other alternatives instead.
Fund Analysis
EQWL has followed the trend of the market in the past
Let us first look at how EQWL performs in different scenarios. As the chart below shows, EQWL basically follows the trend of the market. In a bull’s market, its fund price will generally move up, following the trend of the S&P 500 index and the S&P 100 index. On the other hand, its fund price will move lower in a bear’s market. As can be seen from the chart below, the EQWL has followed the trend of the S&P 500 index and the S&P 100 index by setting a new high towards the end of 2021 and the beginning of 2022. In the same way, the fund retreated for most of 2022 just like other broader market indices and reached a cyclical low in October 2022. Since the low in October 2022, the fund has again followed the trend of the broader market, moved up strongly and delivered a total return of 40.2%. It is worth noting that while EQWL’s return was quite good, its total return trailed the S&P 500 index’s total return of 47.0% and the S&P 100 index’s 54.7%. Over the span of 10 years, EQWL’s total return was also inferior. As can be seen from the chart below, EQWL’s total return of 206.0% was below the S&P 500 index’s 233.7% and S&P 100 index’s 261.9% respectively.
Since its inception in December 2006, EQWL has delivered a total return of 373.2%. As the chart below shows, this total return also trailed the S&P 500 and S&P 100 indices.
What has caused EQWL to deliver a return lower than the two indices in the past? Will this trend continue in the future? This is important as it will impact investors’ decision whether to invest in this fund. We will discuss in detail and provide our insights in the rest of this article.
Equal-weight strategy means frequent rebalancing
First, investors should keep in mind that EQWL has an equal weight strategy to build its portfolio. This means that all stocks in its portfolio have the same allocation after rebalancing. Since the portfolio only keeps the top 100 stocks in the S&P 500 index, each stock will only represent 1% of the portfolio after re-balancing. Below is a table that shows the top 10 holdings of EQWL. Since the fund only rebalances the portfolio quarterly, some of the stocks such as NextEra Energy (NEE), 3M (MMM), General Electric (GE), and Nvidia (NVDA)(NVDA:CA) have weightings above 1% as they have outperformed other stocks since its rebalancing towards the end of last quarter.
The one obvious problem of equal-weight strategy is that rebalancing means higher trading costs. In contrast, market-weight strategy usually means less trading involved. This is reflected in EQWL’s expense ratio. In fact, EQWL’s expense ratio of 0.25% is higher than other funds that tracks the S&P 500 and the S&P 100 indices. For example, iShares S&P 100 ETF, which tracks the S&P 100 index, has an expense ratio of 0.2%. Vanguard S&P 500 ETF, which tracks the S&P 500 index, has an expense ratio of only 0.03%. EQWL’s higher expense ratio may not sound a lot, but over the span of 10 years, it can still impact the total return by several percentage points.
Lower exposure to higher-growth technology sector
Another disadvantage of owning EQWL is its lower exposure to growth sectors such as technology sector. As the table below shows, technology sector only represents about 14.6% of EQWL’s portfolio. This is much lower than the S&P 100 index’s 37.0% and the S&P 500 index’s 30.2%.
In fact, EQWL’s stock style is tilted towards value. In contrast, both the S&P 500 and S&P 100 indices are tilted towards growth. This explains why EQWL’s performance was inferior than the two indices in the past.
Unable to enjoy the full benefit of several megatrends in the long run
The reason why EQWL has lower exposure to growth sector is due to its equal-weight approach. Let us use take a look at several top stocks by market-capitalization in the S&P 100 index: Microsoft (MSFT)(MSFT:CA), Apple (AAPL)(AAPL:CA) and Nvidia. These stocks are also included in EQWL’s portfolio. As the chart below shows, Microsoft and Apple have delivered total returns over 860% and 1150% respectively in the past 10 years. Hence, they represented about 10.4% and 9.6% of the S&P 100 index. Nvidia’s return was even more impressive. The stock has delivered a total return over 2300%, and represent about 7.6% of the index. In contrast, these stocks are only capped at 1% after each rebalancing event that happened quarterly. Therefore, EQWL were unable to enjoy the full benefit of the strong performance of these 3 stocks in the past 10 years.
Technology sector will continue to be the main growth drivers
Looking forward, we expect the major contributor to both the S&P 500 and S&P 100 indices will continue to be technology stocks. This does not mean that other sectors will not contribute. It only means that technology sector will have a larger share of contribution. Several important technological megatrends such as artificial intelligence, autonomous vehicle, cloud computing, AR/VR, and Internet of Things will continue to help technology stocks to outperform many other sectors. Unfortunately, EQWL’s lower exposure to technology stocks and its equal-weight approach will limit the contribution from technology sectors. Hence, it is likely that EQWL will continue to underperform both the S&P 500 and S&P 100 indices in the long run.
The only exception is that if technology sector is in a downward trend such as what happened when the Internet-dot-Com bubble burst in 2000. If technology sector is in a downward trend, EQWL will likely outperform the S&P 500 and the S&P 100 indices.
Investor Takeaway
As we have discussed in our article, EQWL’s equal-weight approach will likely not outperform the broader market. Therefore, we do not think investors need to consider owning this fund in its portfolio.
Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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