The Invesco S&P 500 Equal Weight ETF (XEWE) offers a unique investment approach compared to traditional S&P 500 index funds. By assigning an equal weight to each of the 500 companies in the index, the XEWE ETF provides investors with a different set of performance characteristics and risk profiles. This article delves into the historical and shorter-term performance, sector exposure, fees, and liquidity of the XEWE ETF to provide a comprehensive understanding of its potential benefits and drawbacks for investors.
Historical Performance
Over the long term, the XEWE ETF has demonstrated impressive performance, outpacing the traditional market-cap weighted S&P 500 index. Specifically, the 10-year annualized returns for the XEWE ETF stand at 12.5%, compared to 11.7% for the S&P 500. This outperformance is largely due to the equal weighting methodology, which increases exposure to smaller and mid-cap stocks. Historically, these stocks have often outperformed their large-cap counterparts, contributing to the XEWE ETF’s strong returns.
However, the equal weighting approach does introduce a slightly higher risk profile. The fund’s 10-year standard deviation, a measure of volatility, is 15.8%, compared to 14.2% for the S&P 500. While this higher volatility indicates greater risk, it has been rewarded with stronger long-term returns.
Shorter-Term Performance
In the shorter term, the performance of the XEWE ETF relative to the S&P 500 has been more variable. During bull market periods, the equal-weighted approach tends to lag behind the market-cap weighted index as large-cap growth stocks drive market gains. For example, in 2020, the S&P 500 returned 18.4%, whereas the XEWE ETF posted a return of 11.1%.
Conversely, the XEWE ETF tends to outperform during volatile or bear market conditions. In 2022, a particularly challenging year for equities, the XEWE ETF experienced a loss of 9.1%, significantly better than the S&P 500’s decline of 18.1%. The equal weighting provides more balance and reduces the outsized impact of the largest companies, which often lead the market down during downturns.
Sector Exposure
Another notable difference between the XEWE ETF and the traditional S&P 500 is sector exposure. Due to its equal weighting, the XEWE ETF has a more balanced sector allocation compared to the market-cap weighted S&P 500. As of the end of 2022, the XEWE ETF had a 14.2% allocation to the technology sector, compared to 26.4% for the S&P 500.
This more diversified sector exposure can be advantageous in certain market environments. When a particular sector, like technology, is outperforming, the XEW’E ETF may lag due to its lower allocation. However, during periods of sector rotation or broader market downturns, the XEWE ETF’s balanced approach can help mitigate losses, offering a more stable performance.
Fees and Liquidity
The XEWE ETF, like many ETFs, offers a cost-effective way to gain diversified exposure to the S&P 500. However, investors should be aware of the fees associated with the fund. The expense ratio for the XEWE ETF is generally higher than that of traditional market-cap weighted S&P 500 ETFs. This higher expense ratio can slightly impact net returns over time but is often justified by the fund’s potential for enhanced performance and risk management benefits.
In terms of liquidity, the XEW’E ETF is well-traded, providing investors with the ability to buy and sell shares with relative ease. This liquidity is a crucial factor for those looking to manage their portfolios actively.
Conclusion
The Invesco S&P 500 Equal Weight ETF (XEWE) offers investors a unique approach to gaining exposure to the S&P 500. By assigning an equal weight to each company, the fund provides greater exposure to smaller and mid-cap stocks, resulting in strong long-term performance. While this approach introduces a slightly higher risk profile, the potential for enhanced returns can be attractive for investors willing to accept this trade-off.
The XEWE ETF’s balanced sector exposure and ability to outperform during volatile markets make it a compelling alternative to traditional S&P 500 index funds. Investors seeking to diversify their portfolios and reduce concentration risk may find the XEWE ETF particularly appealing. Overall, the XEWE ETF provides a valuable option for those looking to manage risk while potentially enhancing long-term returns.