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This S&P 500 equal-weight ETF saw record inflows in 2023. Why the 'anti-momentum' fund is back in favor with investors

By Isabel Wang

Flows into Invesco S&P 500 Equal Weight ETF highlight the growing appeal of equal-weight investment strategies in 2023

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this week's edition, we look at an S&P 500 equal-weight ETF that is seeing a notable jump in interest and net inflows in 2023, despite the continued dominance of mega-cap technology stocks.

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The Invesco S&P 500 Equal Weight ETF RSP has been among the top U.S. exchange-traded funds in terms of popularity growth this year.

The fund has gathered more than $10.1 billion in net inflows in 2023 as of Wednesday, including nearly $3.3 billion over the past month alone. That would also mark a net inflow record for the largest equal-weight ETF since its inception in 2003, according to FactSet data.

The year-to-date net inflows of the $45 billion fund, which tracks the S&P 500 Equal Weight Index XX:SP500EW, amount to 31% of its assets under management (AUM) at the beginning of 2023, which stood at $32.8 billion, per FactSet data.

Compare that to the year-to-date net inflows of all ETFs tracking the market-cap-weighted S&P 500. While those funds have seen a whopping $93 billion in total net inflows, that figure only counts for around 10.1% of their collective AUM at the start of the year, according to Nick Kalivas, head of factor and core equity ETF strategy at Invesco.

"As a proportion to the size, RSP is taking market share and finding greater interest in terms of flows, and that shows you that investors have been very interested in mitigating the concentration risk that's present," Kalivas said in a phone interview with MarketWatch on Thursday.

The significant inflows into RSP highlight the growing appeal of equal-weight investment strategies in 2023, despite the outperformance of a few mega-cap technology stocks having sparked debate over narrow-market leadership and whether big tech can prop up the markets again in the year ahead.

See: 'Magnificent Seven' up for another bull run? What to expect from technology stocks in 2024.

But since November, signs that the U.S. stock-market rally is broadening beyond the so-called Magnificent Seven stocks have bolstered investors' hopes heading into 2024. That also coincides with falling Treasury yields BX:TMUBMUSD10Y and expectations that the Federal Reserve next year will cut rates more than than previously outlined.

The S&P 500 Equal Weight Index has risen 4.8% so far in December, compared to increases of 3.3% and 3.8% for the S&P 500 SPX and Nasdaq 100 NDX, respectively, according to FactSet data. It's also notable that the small-cap Russell 2000 RUT, which lagged behind most major indexes this year, has outpaced the S&P 500 this month by its widest margin since January 2021, according to Dow Jones Market Data.

Another reason the investing pendulum has swung back in favor of equal-weight funds is that vehicles like RSP also offer exposure to mega-cap technology stocks and the "relative stability" of the stock market at the same time, said Kalivas. For example, RSP has an average exposure to technology stocks of around 13.9%, compared to roughly 20% for most cap-weighted S&P 500 ETFs, Kalivas said.

"That 20% range shows you that when you [invest in] cap-weighted [indexes], the stocks get bigger with more technology [weight]. But if they were to fall out of favor, like you might see [after a] tech bubble, they could go down quite a bit," Kalivas said. "There's no mechanism for the investor to re-weigh everything in a cap-weighted index."

See: Popular QQQ ETF on track for biggest monthly gain since July 2022 as tech stocks soar


That said, if investors still want to own leading mega-cap tech stocks, it's tough to beat funds such as the widely-held Invesco QQQ Trust Series I QQQ, which tracks the Nasdaq 100 and companies like Nvidia (NVDA), Apple (AAPL) and Tesla (TSLA). With nearly $5.5 billion in net inflows year-to-date, the fund, which manages $222 billion in assets, has advanced more than 52% so far in 2023, according to FactSet data.

Meanwhile, the Invesco Nasdaq 100 ETF QQQM, which also tracks the Nasdaq 100 but with a lower expense ratio and lower index-tracking difference, could offer retail investors an opportunity to achieve the same exposure with a lower cost, said Kalivas.

On top of that, many older funds like QQQ, which launched in 1999, were structured as trusts, meaning they can not reinvest dividends. That could make QQQM a more appealing option, as portfolio managers could reinvest dividends received from tech companies back into the fund.

However, QQQ still has "enormous liquidity and [an] ecosystem that makes it very, very relevant in the marketplace," said Kalivas.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top Performers                                                                                                                                                                    %Performance 
   Invesco Semiconductors ETF                                                                                                                                                        7.0 
   iShares Semiconductor ETF                                                                                                                                                         6.6 
   First Trust Nasdaq Semiconductor ETF                                                                                                                                              6.5 
   SPDR S&P Semiconductor ETF                                                                                                                                                        6.1 
   First Trust RBA American Industrial Renaissance ETF                                                                                                                               6.0 
   Source: FactSet data through Wednesday, Dec 13. Start date Dec 7. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...and the bad

   Bottom Performers                    %Performance 
   AdvisorShares Pure US Cannabis ETF   -14.5 
   United States Natural Gas Fund LP    -9.3 
   Global X MLP ETF                     -1.5 
   Alerian MLP ETF                      -1.3 
   VanEck Vietnam ETF                   -1.0 
   Source: FactSet data 

New ETFs

Defiance ETFs on Wednesday launched the world's first exchange-traded fund tracking Israeli bonds - Defiance Israel Bond ETF CHAI. The fund will provide exposure to Israeli government and corporate bonds, denominated in both USD DXY and ILS ILSUSD. Touchstone Investments on Tuesday announced the launch of the Touchstone Dynamic International ETF TDI, an actively managed fund that seeks to invest in equity securities of non-U.S. companies domiciled in both developed and emerging markets. Infrastructure Capital Advisors on Tuesday launched the InfraCap Small Cap Income ETF SCAP, which invests in small-cap U.S. companies that are poised to deliver both income and growth potential, particularly those that fall into the category of value stocks in the eyes of the fund's management.

Weekly ETF Reads

Home-builder ETFs surge toward all-time highs as Treasury yields fall after Fed meeting (MarketWatch)BlackRock's Rick Rieder rolls out his second ETF as active exchange-traded funds surge (MarketWatch)Holding an Index Doesn't Mean Job Done on Investing (Bloomberg) Volatility ebbs as $26bn pours into option-writing ETFs (Financial Times) Vanguard Is Closer Than Ever to Ending BlackRock's ETF Reign (Bloomberg)

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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12-14-23 1822ET

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