BlackRock launches equal weight S&P 500 ETF

Aug 10th, 2022 | By | Category: Equities

BlackRock has launched a new ETF in Europe providing equally weighted exposure to the companies that make up the S&P 500.

BlackRock launches equal weight S&P 500 ETF

BlackRock has introduced an equally weighted S&P 500 ETF in Europe.

The iShares S&P 500 Equal Weight UCITS ETF has been listed on the London Stock Exchange in GBP (EWSP LN) and GBP-hedged (ISPE LN) share classes as well as on Euronext Amsterdam in US dollars (EWSP NA).

The fund comes with an expense ratio of 0.20% for its unhedged share classes and 0.22% for the GBP-hedged share class.

The ETF tracks the S&P 500 Equal Weight Index which consists of all S&P 500 constituents equally weighted on a quarterly basis.

Proponents of an equal-weight investment approach highlight how the strategy mitigates one of the most common criticisms of market capitalization-weighted indices – the concentration risk imposed by the largest constituents.

For the S&P 500, the ten largest constituents by weight currently constitute more than a quarter (29.5%) of the total index: Apple (7.3%), Microsoft (6.1%), Alphabet (3.9%), Amazon (3.5%), Tesla (2.1%), Berkshire Hathaway (1.5%), UnitedHealth Group (1.5%), Johnson & Johnson (1.3%), Nvidia (1.2%), and Meta Platforms (1.1%). In contrast, the S&P 500 Equal Weight Index weights each of the five hundred companies at just 0.2% at each quarterly rebalance.

As well as enhanced diversification at the stock level, the equal-weight version of the index offers reduced sector risk with the contribution of information technology stocks trimmed from 28.1% to 15.8%.

Despite diversification benefits, equal-weighted approaches may go through periods of relative underperformance, such as in momentum-driven markets and when larger firms experience growth runs beyond the return on the broad market.

Looking at this year’s performance, however, the S&P 500 Equal Weight Index has delivered superior performance, notching up a slight gain of 0.7% compared to a loss of 2.4% for the regular S&P 500 (data as of 8 August). The equal-weighted approach has outperformed because technology stocks, which account for the largest positions in the S&P 500, are particularly vulnerable in rising rate environments as their valuations are often based on the present value of cash flows expected far in the future.

DWS and Invesco also offer equal weight S&P 500 ETFs in Europe. The $3.6bn Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW LN) comes with an expense ratio of 0.25%, while the $25m Invesco S&P 500 Equal Weight UCITS ETF (SPED LN) costs 0.20%.

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