RSP vs. QQQ: Equal Weight ETF Takes on Mag Seven
Billions flowing into Invesco's RSP suggests increasing caution among financial advisors.
After a year in which a handful of stocks carried the weight of the largest and most popular indexes, a look beneath the hot performance indicates increasing caution among ETF investors.
While ETFs like the $232 billion Invesco QQQ Trust (QQQ) might represent the poster child of the so-called Magnificent Seven market-cap weighted muscle, asset flows last year suggests increasing caution among long-term investors.
At Invesco, the 55% gain last year by QQQ easily justified the $7 billion worth of inflows into that ETF, but the nearly $13 billion into the $49.6 billion Invesco S&P 500 Equal Weight ETF (RSP) tells a different story.
“It really has to do with investors realizing that the S&P 500 or Russell 1000 indexes have become very growthy, where the top 10 names make up 30% of the index,” said Nick Kalivas, head of factor and core equity product strategy at Atlanta-based Invesco, one of the world's largest exchange-traded fund issuers with $457.7 billion in 221 funds.
“People realized there are risks in too much concentration and they are looking at RSP as a way to construct a better core,” he added.
RSP vs QQQ: Equal Weight vs Mag 7
Unlike traditional market-cap weighted indexes that let the largest and best performing stocks lead index weightings, an equal-weighted strategy like RSP effectively offers more diversity across market capitalization and into the value side.
Kalivas said increased interest in an equal-weighted index ETF typically follows a pullback by the growth stocks leading the bull market, which hasn’t happened yet.
The flows into RSP, which led all Invesco ETFs last year, was followed by the $19.3 billion Invesco NASDAQ QQQ ETF (QQQM), which had the second-most inflows last year at Invesco with $8.4 billion.
“If you run a model or if have a stickier allocation, you see more interest in QQQM over QQQ, which is more of a trading vehicle,” Kalivas said.
In essence, he believes it is financial advisors and other types of long-term investors leading the migration away from the growth-oriented cap-weighted indexes.
Sumit Roy, senior ETF analyst at etf.com, also sees the emergence of “two camps; one that believes that mega cap tech stocks will continue to dominate and power the market higher, and the other that believes that either those stocks will eventually falter or that the rally in stocks will broaden out to encompass many more stocks and sectors.”
Paul Schatz, president of Heritage Capital, views the flows into RSP as an “anti-Mag Seven play.”
“To purely speculate, I would say that lots of investors got caught with low equity exposure for part or much of the year and tried playing catch up by buying all the stuff that didn’t do the Magnificent Seven melt up,” he added. “As usual, the masses failed.”
If performance was the sole driver to RSP, then it was a failure. The equal-weight strategy gained a respectable 14% last year, 41 percentage points behind the Mag Seven dominated QQQ.
“I wonder what the allure of RSP is,” said Tim Holsworth, president of AHP Financial.
“We would use a value oriented, or dividend stock-oriented ETF and a true S&P 500 ETF, rather than a diluted equal weight S&P index,” he added. “Frankly, it would be tough to defend the performance of an ETF that severely under performs the actual index performance because it’s equal weighted.”
Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter
