S&P 500 ETFs Dominate European Equal-Weights

The funds are riding on the performance of the "Magnificent Seven" group of tech stocks.

Reviewed by: etf.com Staff
Edited by: Mark Nacinovich

LONDON—The pendulum has swung back in favor of market cap versus equal-weighting as investors turn risk-on in their S&P 500 ETF allocations over the past month.

According to data from ETFbook, two of the five top inflowing ETFs in Europe are market cap-weighted S&P 500 ETFs over the past month, adding $2.2 billion in net new assets, as of Dec 12.

Similarly, S&P 500 market cap-weighted ETFs comprised four out of five of the top inflowing U.S. equity ETFs listed on the London Stock Exchange in November. The only exception was an actively managed ETF from J.P. Morgan Asset Management.

The shift back in favor of S&P 500 ETFs, which are overconcentrated in a handful of large-cap names, coincides with less hawkish messaging from central banks and consecutive rate pauses at Federal Open Market Committee meetings.

With BlackRock, Vanguard, Deutsche Bank, Citi, BNP Paribas Asset Management and JPMorgan 2024 outlooks calling for Federal Reserve policy rate cuts to commence between the second quarter and third quarter next year, a new lease of life has been offered to risk-on positioning as investors price in good news for tech stocks whose valuations depend on future cash flows.

Bullish on Artificial Intelligence

Citi expects a “major AI buildout amid easier financial conditions,” with U.S. large-cap tech, communications and consumer names being key drivers of this theme.

BlackRock noted it is overweight AI in developed markets on a tactical basis, with tech sector earnings resilience expected to be a key driver of overall U.S. corporate profit growth next year.

Dewi John, head of Lipper research, U.K. and Ireland, at Refinitiv, said: “While previous months have seen investors hedge their exposure to the ‘Magnificent Seven’ by buying equally weighted large-cap indexed products, this has not been the case in November.

“Instead, it has been a full-blooded exposure to the cap-weighted S&P, albeit with JPM’s Research Enhanced fund making an impression. It has also worth noting that Nasdaq-100 trackers have also proven popular this month.”

Narrow leadership by a handful of mega-cap names saw equal-weight ETFs languish in early 2023, with the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW) booking $647 million in outflows in the first five months of the year.

‘Magnificent Seven’ Dominance

However, the magnitude of “Magnificent Seven” dominance began to send alarm bells ringing for fund selectors after it emerged the group had added $3.6 trillion to their combined market cap and comprised all gains made by the S&P 500 in the first half of the year.

Following a special rebalance to reduce overconcentration within the Nasdaq-100, investors poured $1.7 billion into XDEW in the third quarter, accounting for a fifth of all flows into DWS’s 200-strong product range during the period and earning it the title of “ETF of the Year” at ETF Stream’s ETF Awards 2023.

By opting for equal-weighting versus market cap-weighting, XDEW investors more than halved their tech sector exposure within their S&P 500 allocation from 27.5% to 13%. 

However, doing so has also meant leaving plenty of returns on the table, with XDEW returning 8.5% this year as of Dec. 13, versus 22% gains for the vanilla Xtrackers S&P 500 UCITS ETF (XDPU)

Investors swinging back in favor of vanilla S&P 500 trackers ahead of a soft landing, rate-cutting base case for 2024 has also been reflected in other risk-on allocations, with investors pulling $1.1 billion from the PIMCO US Dollar Short Maturity UCITS ETF (MINT) and pouring $943 million into the iShares € High Yield Corporate Bond UCITS ETF (IHYG) over the past month.

Jamie started at ETF Stream as a reporter in January 2021. Previously, he was a senior journalist at the UK Investor Magazine, Investment Observer, UK Startup Magazine and UK Property Journal. He holds an undergraduate degree in politics and international relations, and a postgraduate degree in ethics.