Do Equal Weight ETFs Beat Cap Weight Counterparts?

“Stock Size and Excess Stock Portfolio Growth” finds that an equal-weighted portfolio of the (each day) 1,000 largest U.S. stocks beats its market capitalization-weighted counterpart by about 2% per year. However, the underlying research does not account for portfolio rebalancing costs and may not be representative of other stock universes. Do exchange-traded funds (ETF) that implement equal weight for various U.S. stock indexes confirm findings? To investigate, we consider eight equal-weight ETFs, four alive and four dead:

• Invesco S&P 500 Equal Weight ETF (RSP) – seeks to track investment results (before fees and expenses) of the S&P 500 Equal Weight Index. The capitalization-weighted counterpart is SPDR S&P 500 ETF Trust (SPY).
• First Trust NASDAQ-100 Equal Weight ETF (QQEW) – seeks to track investment results (before fees and expenses) of the NASDAQ-100 Equal Weight Index. The capitalization-weighted counterpart is Invesco QQQ Trust (QQQ).
• Invesco S&P 100 Equal Weight ETF (EQWL) – seeks to track investment results (before fees and expenses) of the S&P 100 Equal Weight Index. The capitalization-weighted counterpart is iShares S&P 100 ETF (OEF).
• Invesco Russell MidCap Equal Weight ETF (EQWM) – seeks to track investment results (before fees and expenses) of the Russell Midcap Equal Weight Index. The capitalization-weighted counterpart is iShares Russell Mid-Cap ETF (IWR). The offeror discontinued this fund in July 2019.
• Invesco Russell 2000 Equal Weight ETF (EQWS) – seeks to track investment results (before fees and expenses) of the Russell 2000 Equal Weight Index. The capitalization-weighted counterpart is iShares Russell 2000 ETF (IWM). The offeror discontinued this fund in February 2019.
• Invesco S&P MidCap 400 Equal Weight ETF (EWMC) – seeks to track investment results (before fees and expenses) of the S&P MidCap 400 Equal Weight Index. The capitalization-weighted counterpart is SPDR S&P MidCap 400 ETF Trust (MDY). The offeror effectively discontinued this fund in August 2023 by changing its allocation rules.
• Invesco S&P SmallCap 600 Equal Weight ETF (EWSC) – seeks to track investment results (before fees and expenses) of the S&P SmallCap 600 Equal Weight Index. The capitalization-weighted counterpart is Vanguard S&P Small-Cap 600 Index Fund (VIOO). The offeror discontinued this fund in February 2023.
• Invesco Russell 1000 Equal Weight ETF (EQAL) – seeks to track investment results (before fees and expenses) of the Russell 1000 Equal Weight Index. The capitalization-weighted counterpart is iShares Russell 1000 ETF (IWB).

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted prices for the 16 ETFs as available (limited by equal-weighted funds) through June 2024, we find that: (more…)