Animal Spirits Podcast Summary Episode: Talk Your Book: Equal Weight Investing
Release Date: April 28, 2025
Host: Michael Batnick and Ben Carlson
Guest: Nick Kalivas, Head of Factor and Core Equity Product Strategy at Invesco

Introduction to Equal Weight Investing

In the April 28, 2025 episode of Animal Spirits, hosts Michael Batnick and Ben Carlson delve into the intricacies of equal weight investing with their guest, Nick Kalivas from Invesco. The conversation centers around the Invesco S&P 500 Equal Weight ETF (RSP), its historical performance, underlying strategies, and its place in the current market environment.

Historical Performance of RSP

Michael Batnik initiates the discussion by highlighting the impressive historical performance of RSP. He shares his surprise at the ETF's ability to outperform the S&P 500 over an extended period, including during the recent dominance of mega-cap stocks.

"RSP has been around since sometime in 2003 and it has outperformed the S&P 500 by roughly 60% in total over that time. I never would have believed that." (00:50)

Nick Kalivas corroborates this by emphasizing the resilience of equal weight strategies even amidst market cycles favoring large-cap dominance.

"The Mag 7 as a group are down 22%. The S&P is down 11. And the equal weight, I mean, still down 9%. Not, not cheering for that, but a little bit better than the cap weighted index." (02:31)

Mechanics of the Equal Weight ETF

Ben Carlson steers the conversation towards explaining how the equal weight ETF operates, making it accessible for listeners unfamiliar with the strategy.

"Just lay it out. Obviously the name is in the name of the fund, but just explain how this fund actually works for people who are unaware." (03:50)

Nick provides a clear breakdown:

"You literally just take every name in the S&P 500 and equally weighted. And then every quarter what happens is that those stocks that have risen above their equal weighting, they're pared back to equal weight. And those stocks that are weighted below their equal weighting are brought back up to equal weight." (04:04)

He further explains that this approach introduces a small tilt towards smaller companies and value stocks, leveraging the size and value factors historically rewarded in the market.

Performance Drivers and Factor Tilts

The discussion deepens as Nick attributes RSP's superior performance to its inherent tilt towards size and value factors, aligning with the Fama-French model.

"It really comes back to that size value tilt and kind of the fama French rewarded factors. So I think that's what's really kind of driven it over the long term." (07:00)

Michael notes the longevity and consistent outperformance of RSP, questioning why this strategy has remained effective despite market shifts favoring mega-cap growth stocks.

Nick responds by emphasizing the cyclical nature of factor performance and the importance of maintaining exposure to historically robust factors like size and value.

"People have very shorter term memories and they forget about the power of equal weighting over long periods of time. So when you go way back in history, you've been able to generate the excess return from an equal weight strategy because of the fact that it's tilting you towards the smaller stocks and the value that's present." (05:34)

Market Concentration and Equal Weight's Role

Nick discusses the increasing concentration in large-cap stocks and how equal weight strategies offer a counterbalance by providing broader exposure across the S&P 500.

"You own all 500 of them and you tend to own a bigger weight than what you do in equal weight and kind of some of the techie names. So a lot of our clients who think that equal weight is just got too small of an allocation that, you know, Apple or Meta, whatever will drop themselves into revenue weight." (12:55)

He explains that in the equal weight ETF, the top holdings constitute a smaller percentage compared to the cap-weighted index, thereby reducing concentration risk.

"In the cap weighted fund, 71% is in the 1 to 100, the 4 to 500, by contrast, it's 3%. They might as well not even exist. They could effectively go to zero and, and you barely would even feel it." (08:34)

Comparing Equal Weight with Other Weighting Strategies

The hosts explore alternative weighting strategies, such as revenue-weighted ETFs, and their interplay with equal weight approaches. Nick elaborates on Invesco's offerings, including QQQM, a revenue-weighted version of the NASDAQ 100, highlighting its lower share price and structural differences from QQQ.

"QQQM has really kind of caught on. You know, what we try to do here at Invesco is really provide access to factor investing." (14:58)

He also touches upon the ongoing interest in equal weight strategies despite occasional outflows, attributing it to investors' desire to manage concentration risk and seek more durable portfolios.

Low Volatility and Quality Factors

The conversation shifts to other factor-based ETFs like SPLV (Low Volatility) and Quality. Nick discusses the enduring appeal of low volatility strategies, especially among older investors concerned with the sequence of returns.

"They're very comfortable with kind of what has been the smoother ride in low volume." (18:54)

Regarding the Quality factor, Nick explains its attractiveness due to high return on equity, efficient capital use, and stable earnings growth. He emphasizes that Quality ETFs maintain low tracking error relative to the S&P 500, making them a viable option for investors seeking differentiated returns without significant divergence from the broader market.

"If it works against you, you're not that much trailing. If it works for you, you tend to get a little bit extra performance." (22:58)

Option-Based Income Strategies

Michael introduces the topic of options-based strategies, noting their rising popularity due to attractive income potential. Nick outlines Invesco's income advantage funds, which utilize options to generate income while maintaining exposure to key indices.

"So we're offering that against the NASDAQ 100 in QQA, we have RSPA. So there's actually one that's done on equal weight." (21:59)

He explains how these strategies involve selling calls and puts to produce income, catering to investors seeking higher yields within their portfolios.

Future Outlook and Investor Behavior

As the episode draws towards its conclusion, Nick shares observations on current market behavior, noting that even amidst corrections, there remains strong interest in both cap-weighted and equal weight ETFs. He highlights a surprising trend where investors continue to accumulate in high-performing indices like NASDAQ 100, anticipating sustained growth.

"We're seeing very strong flows in the NASDAQ 100 cap weighted products here. People seem to think that what's happened in the past is just going to continue to run in the future." (14:14)

Conclusion and Resources

The podcast wraps up with Nick directing listeners to Invesco's website for more information on their suite of equal weight and factor-based ETFs. He underscores Invesco's commitment to providing diversified investment options tailored to various investor goals.

"Just go to Invesco.com I mean, you could. You could just probably Google RSP and it would come right up. So plenty of information on our website." (25:31)

Michael concludes by encouraging listeners to explore Invesco's products to enhance their investment strategies.

Key Takeaways:

• Equal Weight Investing (RSP): Offers a balanced exposure to all S&P 500 companies, reducing concentration risk and tilting towards size and value factors.

• Historical Outperformance: RSP has consistently outperformed the S&P 500 over two decades, driven by its strategic tilts and rebalancing mechanism.

• Factor-Based Strategies: Invesco provides a diverse range of factor ETFs, including Low Volatility (SPLV) and Quality, catering to different investor preferences and risk profiles.

• Revenue-Weighted ETFs (QQQM): Serve as an alternative to traditional cap-weighted indices, offering lower share prices and efficient tracking.

• Options-Based Income: Invesco's income advantage funds utilize options strategies to generate additional income, appealing to income-focused investors.

• Investor Behavior: Despite market corrections, there's sustained interest in both cap-weighted and equal weight ETFs, reflecting diverse investment strategies and goals.

For more detailed information on the discussed investment strategies and Invesco's ETF offerings, visit Invesco.com.

Timestamps:

• 00:50 - Introduction to RSP's performance
• 02:31 - Current performance comparison
• 03:50 - Simplifying equal weight strategy
• 04:04 - Mechanics of RSP
• 05:34 - Factor tilts and performance drivers
• 07:00 - Long-term drivers of RSP
• 08:34 - Concentration in cap-weighted indices
• 12:55 - Managing concentration risk
• 14:14 - Behavior during market corrections
• 14:58 - Introduction to QQQM
• 18:54 - Low volatility strategies
• 21:59 - Options-based income strategies
• 22:58 - Quality factor attractiveness
• 25:31 - Resources and conclusion

Note: The timestamps correspond to the segments within the podcast transcript provided.