Equal weight investing has become increasingly popular in recent years as a way to outperform market capitalization weighted indexes. The idea is to allocate an equal amount of money to each company in an index, rather than weighting based on market cap. This results in tilting the portfolio towards smaller companies that tend to outperform over time. In 2020, equal weight indexes and ETFs significantly outperformed traditional market cap weighted indexes across a variety of sectors. For example, the Invesco S&P 500 Equal Weight ETF (RSP) returned 17.7% compared to the S&P 500’s 18.4%. The Invesco Russell 2000 Equal Weight ETF (EWRS) gained 30.7% versus the Russell 2000’s 20%. This article will analyze some of the top performing equal weight ETFs in 2020 and the companies that drove this outperformance to illustrate the potential benefits of this investment strategy.
Invesco S&P 500 Equal Weight ETF (RSP) – Outperformed S&P 500 in multiple sectors
The Invesco S&P 500 Equal Weight ETF (RSP) holds all 500 companies in the S&P 500 but allocates an equal weight of around 0.2% to each one upon rebalancing. This results in a greater exposure to mid and small cap companies compared to the market cap weighted S&P 500 index. In 2020, RSP outperformed the S&P 500 in 5 out of 11 sectors – information technology, healthcare, consumer discretionary, materials and real estate. Top performing equal weighted companies included AMD (+99%), Western Digital (+62%), Twitter (+65%), Etsy (+295%) and Paycom Software (+97%). Many of these were smaller cap tech and internet-related stocks that soared during the pandemic and work-from-home trends.
Invesco Russell 2000 Equal Weight ETF (EWRS) – Significant small cap outperformance
The Invesco Russell 2000 Equal Weight ETF (EWRS) posted even stronger returns relative to its market cap weighted benchmark index. It invests equally across all 2,000 small cap companies that make up the Russell 2000 index. In 2020, it gained 30.7% compared to 20% for the Russell 2000 – an outperformance of over 10 percentage points. Top performing stocks included vaccine makers like Novavax (+2,770%) and BioNTech (+214%) which benefitted tremendously from equal weight allocations. Other top gainers were small cap stocks like Overstock (+747%), ON Semiconductor (+90%) and Plug Power (+918%) which surged from stay-at-home and electric vehicle growth trends.
First Trust Dorsey Wright Focus 5 ETF (FV) – Concentrated equal weight strategy
For investors wanting more concentrated exposure, the First Trust Dorsey Wright Focus 5 (FV) offers an equal weight portfolio of just the top 5 ranked stocks from the Nasdaq US Large Cap Index. It rebalances the portfolio each quarter. In 2020, FV returned 35.4%, handily beating the Nasdaq 100’s 48.9% gain. Top stocks included Apple, Microsoft, Amazon, Tesla, Nvidia. The equal weighting meant less exposure to mega-caps like Apple and Microsoft and greater allocations to strongly performing mid caps like Tesla (+743%) and Nvidia (+122%).
In summary, equal weight investing led to significant outperformance versus market capitalization weighted benchmarks across a variety of sectors and indexes in 2020. By overweighting smaller companies and limiting concentration risk, equal weight indexes were well positioned to benefit from surging stay-at-home stocks and vaccine makers during the pandemic.