Investors have been keen to play down the recent market volatility in equity markets routinely stressing now is not the time to panic.
This was the case during last month’s correction that saw the S&P 500 fall 8.5% from its July peak to its August lows driven by a few megacap stocks. The S&P 500 almost made up those losses, rising 7.9% in the month since.
However, many investors still believe there is more volatility on the horizon, highlighting risks such as geopolitics and the upcoming US elections in November, with many meaning the diversification equal-weight ETFs still have a part play.
Leading the way is the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW), which has recorded $1.4bn inflows year to date, while the Xtrackers S&P 500 Equal Weight ESG UCITS ETF (XZEW) has seen a further $940m in net new assets, according to data from TrackInsight.
Meanwhile, the $2.3bn iShares S&P 500 Equal Weight UCITS ETF (EWSP) has recorded $1.4bn inflows year to date, with $867m coming in the last month alone.
Why now?
Positive tailwinds for the US economy such as moderating inflation could actually prove positive for the equal weight strategy, if you believe the earnings growth gap between large-cap tech and rest of the market closing.
The obvious downside to the equal-weight strategy is that it misses out on the performance of the mega-cap stocks driving much of the returns.
For example, XDEW has returned 5.3% year to date, versus 18% for the S&P 500, as at 12 September.
Zooming in however, XDEW has returned 5.4% compared to 3% for the flagship index over the past three months.
Last week, Invesco launched the Invesco MSCI World Equal Weight UCITS ETF (MWEQ), offering a global exposure to offer investors broad exposure to equity markets but with reduced sensitivity to the performance of any individual company.
What are the alternatives?
Concerns have also been raised around the rebalancing of these products.
Speaking at ETF Stream’s ETF Ecosystem Unwrapped in May, Elroy Dimson, professor of finance at Cambridge Judge Business School, called the strategy “an appallingly bad idea” as they “sell the winners and buy the losers” to get back to equal weight.
As such, there are other ETFs investors can consider if they are looking to avoid overconcentration, allowing them to become more targeted with their equity exposure.
One such product is the Xtrackers MSCI World ex USA UCITS ETF (EXUS), allowing investors to segment their US exposure from the rest of the global equity portfolio.
Excluding markets from broad-based indices is becoming an increasingly popular trade investors need to get more granular with their asset allocation.
Either way, there are increasing ways for investors to hedge if they fear volatility going forward.
