Why this ‘anti-momentum’ ETF is again in favor with buyers

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The Invesco S&P 500 Equal Weight ETF
RSP
has been among the many high U.S. exchange-traded funds when it comes to recognition progress this 12 months. 

The fund has gathered greater than $10.1 billion in web inflows in 2023 as of Wednesday, together with almost $3.3 billion over the previous month alone. That would additionally mark a web influx document for the biggest equal-weight ETF since its inception in 2003, in keeping with FactSet knowledge. 

The year-to-date web inflows of the $45 billion fund, which tracks the S&P 500 Equal Weight Index
XX:SP500EW,
quantity to 31% of its property underneath administration (AUM) originally of 2023, which stood at $32.8 billion, per FactSet knowledge.

Compare that to the year-to-date web inflows of all ETFs monitoring the market-cap-weighted S&P 500. While these funds have seen a whopping $93 billion in complete web inflows, that determine solely counts for round 10.1% of their collective AUM at the beginning of the 12 months, in keeping with Nick Kalivas, head of issue and core fairness ETF technique 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 mentioned in a telephone interview with MarketWatch on Thursday. 

The important inflows into RSP spotlight the rising enchantment of equal-weight funding methods in 2023, regardless of the outperformance of some mega-cap expertise shares having sparked debate over narrow-market management and whether or not large tech can prop up the markets once more within the 12 months forward. 

See: ‘Magnificent Seven’ up for one more bull run? What to anticipate from expertise shares in 2024.

But since November, indicators that the U.S. stock-market rally is broadening past the so-called Magnificent Seven shares have bolstered buyers’ hopes heading into 2024. That additionally coincides with falling Treasury yields
BX:TMUBMUSD10Y
and expectations that the Federal Reserve subsequent 12 months will minimize charges greater than than beforehand outlined. 

The S&P 500 Equal Weight Index has risen 4.8% to this point in December, in comparison with will increase of three.3% and three.8% for the S&P 500
SPX
and Nasdaq 100
NDX,
respectively, in keeping with FactSet knowledge. It’s additionally notable that the small-cap Russell 2000
RUT,
which lagged behind most main indexes this 12 months, has outpaced the S&P 500 this month by its widest margin since January 2021, in keeping with Dow Jones Market Data. 

Another cause the investing pendulum has swung again in favor of equal-weight funds is that automobiles like RSP additionally provide publicity to mega-cap expertise shares and the “relative stability” of the inventory market on the identical time, mentioned Kalivas. For instance, RSP has a mean publicity to expertise shares of round 13.9%, in comparison with roughly 20% for many cap-weighted S&P 500 ETFs, Kalivas mentioned.

“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 mentioned. “There’s no mechanism for the investor to re-weigh everything in a cap-weighted index.” 

See: Popular QQQ ETF on monitor for greatest month-to-month achieve since July 2022 as tech shares soar

QQQ or QQQM

That mentioned, if buyers nonetheless need to personal main mega-cap tech shares, it’s powerful to beat funds such because the widely-held Invesco QQQ Trust Series I
QQQ,
which tracks the Nasdaq 100 and corporations like Nvidia
NVDA,
+0.54%,
Apple
AAPL,
+0.08%
and Tesla
TSLA,
+4.91%.
With almost $5.5 billion in web inflows year-to-date, the fund, which manages $222 billion in property, has superior greater than 52% to this point in 2023, in keeping with FactSet knowledge. 

Meanwhile, the Invesco Nasdaq 100 ETF
QQQM,
which additionally tracks the Nasdaq 100 however with a decrease expense ratio and decrease index-tracking distinction, may provide retail buyers a chance to realize the identical publicity with a decrease value, mentioned Kalivas.

On high of that, many older funds like QQQ, which launched in 1999, had been structured as trusts, that means they cannot reinvest dividends. That may make QQQM a extra interesting possibility, as portfolio managers may reinvest dividends obtained from tech corporations again into the fund. 

However, QQQ nonetheless has “enormous liquidity and [an] ecosystem that makes it very, very relevant in the marketplace,” mentioned Kalivas. 

As ordinary, right here’s your take a look at the top- and bottom-performing ETFs over the previous week by means of Wednesday, in keeping with FactSet knowledge.

The good…

…and the unhealthy

New ETFs

• Defiance ETFs on Wednesday launched the world’s first exchange-traded fund monitoring Israeli bonds — Defiance Israel Bond ETF CHAI. The fund will present publicity to Israeli authorities and company bonds, denominated in each USD
  DXY
  and ILS
  ILSUSD,
  +0.07%.
• Touchstone Investments on Tuesday introduced the launch of the Touchstone Dynamic International ETF
  TDI,
  an actively managed fund that seeks to spend money on fairness securities of non-U.S. corporations domiciled in each developed and rising markets.
• Infrastructure Capital Advisors on Tuesday launched the InfraCap Small Cap Income ETF SCAP, which invests in small-cap U.S. corporations which are poised to ship each revenue and progress potential, notably people who fall into the class of worth shares within the eyes of the fund’s administration.

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