S&P 500 Equal-weight ETF Has Seen Record Inflows in 2023. Why the ‘anti-momentum’ Fund is Back in Favor of Investors

The Invesco S&P 500 Equal Weight ETF has emerged as one of the leading U.S. exchange-traded funds experiencing substantial growth in popularity throughout the current year. According to FactSet data, the fund has attracted over $10.1 billion in net inflows in 2023 as of Wednesday, with nearly $3.3 billion flowing in during the past month alone. This represents a record for net inflows into the largest equal-weight ETF since its inception in 2003.

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Examining the year-to-date net inflows of the $45 billion fund, which tracks the S&P 500 Equal Weight Index, reveals a remarkable 31% increase compared to its assets under management (AUM) at the beginning of 2023, amounting to $32.8 billion, according to FactSet data. This stands in stark contrast to the year-to-date net inflows of all ETFs tracking the market-cap-weighted S&P 500. While those funds have collectively attracted a substantial $93 billion in net inflows, this figure only accounts for around 10.1% of their combined AUM at the start of the year, as highlighted by Nick Kalivas, Head of Factor and Core Equity ETF Strategy at Invesco.

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In a phone interview with MarketWatch, Kalivas emphasized that the Invesco S&P 500 Equal Weight ETF, known as RSP, has been gaining market share and increased interest from investors. This trend indicates a strong desire among investors to mitigate concentration risk, particularly in light of the ongoing debate over narrow-market leadership and the ability of big tech to sustain the markets in the coming year.

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The significant inflows into RSP underscore the growing attraction of equal-weight investment strategies in 2023, despite concerns about the dominance of a few mega-cap technology stocks. Signs of the U.S. stock market rally broadening beyond these tech giants have buoyed investor confidence, coinciding with declining Treasury yields and expectations of the Federal Reserve cutting rates more than previously outlined for the next year.

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In terms of performance, the S&P 500 Equal Weight Index has shown a 4.8% increase in December, outpacing the S&P 500 and Nasdaq 100, which recorded increases of 3.3% and 3.8%, respectively, according to FactSet data. Furthermore, the small-cap Russell 2000, which had lagged behind major indexes earlier in the year, has surpassed the S&P 500 this month by the widest margin since January 2021, according to Dow Jones Market Data.

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The pendulum in investment preferences has swung back in favor of equal-weight funds for several reasons, according to Kalivas. These funds, such as RSP, not only provide exposure to mega-cap technology stocks but also offer relative stability in the stock market. RSP, for instance, maintains an average exposure to technology stocks of around 13.9%, compared to approximately 20% for most cap-weighted S&P 500 ETFs. Kalivas highlights the risk associated with cap-weighted indexes, where stocks can experience significant declines if they fall out of favor.

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While equal-weight funds are gaining traction, investors still seeking exposure to leading mega-cap tech stocks may find funds like the widely-held Invesco QQQ Trust Series I appealing. This fund, tracking the Nasdaq 100 and including companies like Nvidia, Apple, and Tesla, has seen nearly $5.5 billion in net inflows year-to-date and has advanced over 52% in 2023, managing $222 billion in assets.

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For those looking for a lower-cost alternative to QQQ, the Invesco Nasdaq 100 ETF is suggested by Kalivas. Additionally, he notes that older funds like QQQ, structured as trusts, cannot reinvest dividends, making QQQM a potentially more attractive option for investors seeking dividend reinvestment.

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However, Kalivas acknowledges that QQQ still maintains enormous liquidity and relevance in the marketplace. As investment preferences evolve, the market continues to offer a diverse range of options for investors seeking exposure to different sectors and investment strategies.

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As is customary, here's a look at the top- and bottom-performing ETFs over the past week through Wednesday, according to data.