This Sleeper S&P 500 Fund Is Waking Up. How It Could Power Ahead.

The S&P 500 Equal-Weight Index closely resembles the traditional

S&P 500.

But instead of assigning weightings to companies according to their market value, which means the Magnificent Seven make up 30% of the benchmark, it counts every stock equally. Each stock represents 0.2% of the index and the Magnificent Seven collectively comprise less than 2%. 

With moves in big tech stocks determining whether the S&P 500 rises or falls on many days, the equal-weight version has become an increasingly useful gauge of how the rest of the market is doing. The index—along with the

Invesco S&P 500 Equal Weight ETF

that tracks it—has become a go-to metric, cited across Wall Street in recent months. 

A recent research note from Janus Henderson is just one example. “While the market-capitalization weighted S&P 500 has a forward price-to-earnings (P/E) ratio of 21, the forward P/E of the equal-weight version of the Index is a more reasonable 16,” the investment manager said. “The difference reflects the large weighting big tech has in the benchmark.”

Bespoke Investment Group weighed in as well. “Thoughts on S&P equalweight here?” it said in a recent tweet. “Has definitely gone through a long consolidation phase. Can it finally make a new leg higher?”

Overall, the equal-weight index was mentioned in analysts’ notes and news stories more than 6,000 times in the past year, up from about 3,000 in the previous year, according to Factiva. Web searches have increased by about four times, according to Google Trends.

Given the additional attention, investors have been pouring money into the Invesco ETF. The fund has swelled to more than $54 billion on net inflows of nearly $11 billion in the past 12 months, according to FactSet. By contrast, investors have put about $17 billion into the SPDR, which tracks the S&P 500. It is the largest ETF by assets, at $550 billion.

“RSP has been our most discussed ticker,” said John Frank, head of ETF Specialists at Invesco, referring to the fund’s ticker symbol, in an email. “The frequency at which RSP is discussed has never been higher.”

Is all the attention warranted? Largely cut off from 2024’s big tech rally, the equal-weight S&P 500 has returned just 7.6% so far this year, compared with more than 18% for the traditional version. 

But the second-half could look a lot brighter for the S&P 500’s 493 also-rans. Investors have recently begun to question whether enormous investments in AI will pay off, which may mean some of the Magnificent Seven’s outsize valuations are too optimistic.

At the same, the chances the Federal Reserve will start cutting interest rates during the second half of the year have increased dramatically. That tends to help the kind of smaller companies emphasized by an equal-weight index. With less cash and more constrained access to bond markets, smaller companies tend to benefit disproportionately from lower rates.

While it is hardly a small-cap index, the S&P equal-weight has only about a third of its portfolio invested in the market’s 180 largest megacaps, according to FactSet. That compare to more than 80% for the market-weighted index.

The sectors that the equal-weight index emphasizes—such as utilities and real estate—may also give it a lift. Together, these industries make up about 13% of the equal-weight benchmark, compared with around 5% of the S&P 500. 

Real estate has been the worst-performing slice of the S&P 500 so in 2024, but falling rates could give those stocks a boost if they help normalize a gridlocked housing market. Both real estate and utilities stand to benefit from lower rates if their relatively high yields (3.4% for real estate and 3.1% for utilities) become more attractive relative to bonds.

Write to Ian Salisbury at ian.salisbury@barrons.com

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