Invesco S&P 500 Equal Weight Index ETF - CAD

[00:06] Invesco's S&P 500 Equal Weight Index ETF, with the ticker EQL, provides exposure to the broad S&P 500 index, which many consider the bellwether representation of the US stock market.

[00:16] However, instead of having the underlying stocks weighted based on their traditional market capitalization, the ETF, as its name suggests, equally weighs each underlying stock, helping clients access the S&P 500 Index.

[00:32] To achieve this objective, the index sells overvalued stocks and buys undervalued ones during its quarterly rebalancing, ensuring that each individual stock has a 0.2% weight after each rebalance.

[00:45] Quarterly rebalancing also creates a more stable exposure to sectors compared with the S&P 500 Index, which may reduce the impact of market bubbles.

[00:54] It's worth noting that EQL is the first and only ETF in Canada that equally weighs the underlying stocks of the S &P 500 Index.

Why would investors consider the Invesco S&P 500 Equal-Weight Index ETF (EQL)?

[01:06] If you are invested in strategies that track the S&P 500 Index or the broad US market, you may have enjoyed the returns over the past few years.

[01:18] However, this may have come at the cost of concentration risk and stretched valuations. Let's explore how an equally weighted approach to the S&P 500 Index can potentially help you address these concerns.

[01:31] A quick look at the broad US market, represented by the S&P 500 Index, shows that it has been overshadowed by the so-called Magnificent 7, leading to the S&P 500 Index reaching a record concentration level.

[01:45] Digging deeper and looking at the top ten holdings, one can see that they make up about 32% of the Index, the highest level since the late 1970s.

[01:55] So why does this matter? We believe it's important because the traditional market cap weighting naturally understates the future disruptors.

[02:03] Twenty years ago, the current 10 names represented only 4% of the Index. The equal weight strategy can help mitigate concentration risk, ensuring a broad exposure to the S&P 500 Index.

[02:16] The second concern is the stretched valuations of the S&P 500 Index, which the heightened concentration in the top 10 holdings has contributed to over the past few years.

[02:25] As of the end of March, 2024, the high valuations in mega-cap names have pushed the S&P 500 forward P/E ratio to 21.9, while the equal weight index had a forward P/E ratio of 18.3.

[02:40] This means that the equal weight strategy was trading at a 16% discount to the S&P 500 Index.

[02:48] Looking at historical trends, over the past 20 years, the equal weight and the cap weighted S&P 500 have had similar P/E ratios.

[02:55] Trading at a 16% discount makes the equal weight strategy attractive from a valuation perspective, and its approach may help mitigate some of the valuation risk present in the S&P 500 Index.

What role does the Invesco S&P 500 Equal-Weight Index ETF (EQL) play in a portfolio?

[03:11] Invesco's S&P 500 Equal Weight strategy aims to provide broad and core U.S. equity exposure by equally weighting the underlying holdings while alleviating concentration risk and addressing stretched valuations of the S&P 500 Index.

[03:30] All of that is offered cost-effectively with its management expense ratio being 80% lower than the average mutual fund or ETF in the U.S. equity Morningstar category.

[03:41] Three potentially effective ways to implement EQL in portfolios include diversifying traditional and market cap-weighted U .S. equity exposure, complementing large cap and growth -oriented strategies, or replacing high fee and under-performing strategies.