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Invesco has launched the Invesco S&P Europe 350 Equal Weight Index ETF (EQE CN) on Canada’s NEO Exchange.
Invesco Canada also provides equally weighted exposure to US large-caps through the Invesco S&P 500 Equal Weight Index ETF (EQL CN) which launched in May 2018.
The fund tracks the S&P Europe 350 Equal Weight Index and is Canada’s first ETF to provide equal-weight exposure to European large-cap equities.
The index weights each company within the parent S&P Europe 350 equally at each quarterly rebalancing.
Proponents of equal-weighted indices highlight that the weighting methodology avoids overweighting the most overvalued stocks in an index universe, a criticism of traditional market cap-weighted approaches.
Equal-weighted strategies also help to balance or diversify stock-specific risk.
“Investors seeking low-cost exposure to European equities through a cap-weighted index may inadvertently take on substantial concentration risk,” said Jasmit Bhandal, Head of ETF Product Strategy and Development with Invesco Canada. “The equal-weight strategy of EQE can help mitigate that risk, and provide greater diversification potential.”
To illustrate his point, Bhandal notes the top 50 stocks in the S&P Europe 350 account for 49% of the index weight as compared to the equal weight version in which the top 50 stocks are only 16% of the index weight.
While the equal-weight approach eliminates a common criticism of market cap-weighted benchmarks, the strategy may go through periods of relative underperformance – such as when the largest cap firms are experiencing a growth run beyond the return on the broad market or when value-oriented stocks are out of favour.
This scenario has not be the case in Europe recently, with the equal-weight index showing superior annualized return performance over one (7.4%), three (6.9%), five (10.1%), and ten-year (8.3%) time periods compared to 5.5%, 5.2%, 8.5%, and 6.4% respectively for its market cap-weighted counterpart.
The new fund comes with a management expense ratio (MER) of 0.30% and is also available in a CAD-hedged format under the ticker EQE.F CN.
The fund follows the Invesco S&P 500 Equal Weight Index ETF (EQL CN), which was launched in May 2018. EQL comes with a MER of 0.25% and has grown its AUM to C$80m since launch.