Continuing the series of articles on smart beta ETF strategies, I would like to review the Invesco S&P 100 Equal Weight ETF (NYSEARCA:EQWL), a fund offering an alternative, value-ish take on U.S. bellwethers.
Even though my notes touching upon U.S. mega-cap names have mostly had a skeptical tone, predominantly owing to interest rate concerns, today I would like to present a more bullish analysis due to the following reasons:
- EQWL offers a much more convincing value story than its simpler market-cap-weighted peers like the iShares Core S&P 500 ETF (IVV) and the iShares S&P 100 ETF (OEF).
- The fund achieved a slight value tilt without compromising on exposure to top-quality stories.
- Importantly, unlike equal-weight strategies I reviewed in the past, including the Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW), EQWL offered some downside protection amid market turmoil, as illustrated by its maximum drawdown compared to peers.
Nevertheless, EQWL does have a few downsides, like its rather small exposure to the growth factor, which are detailed below in the note.
EQWL strategy: major points
According to the EQWL website, its investment mandate is to track the quarterly-rebalanced S&P 100 Equal Weight Index, a recalibrated version of the S&P 100. An essential remark worth making here is that even though EQWL was incepted in January 2006, most of its trading history is useless and thus will be ignored in the returns analysis section, with the reason being a few strategy changes in the past. The most recent one was the adoption of its current index in June 2019. Before that, it tracked the Russell Top 200 Equal Weight Index. Earlier, it had also seen a few index changes; more details can be found in the fact sheet.
Factor exposures: EQWL delivers stronger value characteristics without compromising on quality
As of November 12, EQWL had a portfolio of 101 equities (assuming both Class A and Class C of Alphabet shares (GOOGL) (GOOG) were present). The key ten holdings account for just 11.4% of the net assets, and obviously, individual stock risks are much better dispersed compared to OEF, which allocated almost 47% to the top ten positions. And while OEF investors should be prepared for an overweening exposure to the $1 trillion league, including Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), etc., which has a 37% weight in its portfolio, EQWL investors who are skeptical about these stocks having the potential to march considerably higher from here should be comfortable with the fact that the fund has an almost 7x lower allocation to them.
The weighting schema also resulted in remarkable differences in sector exposures.
Created by the author using data from the funds
The principal difference is that EQWL is substantially underweight IT, with an allocation more than 20% lower. Other sectors have not seen a weight cut that large. For instance, its exposure to communication is only 2% lower, while its footprint in the energy sector (represented by ConocoPhillips (COP), Exxon Mobil (XOM), and Chevron (CVX)) is on par with OEF. Meanwhile, we see that old-economy sectors like consumer staples, financials, and industrials all have weights a few percent larger, which welcomes a much more comfortable valuation (more on that below).
Now, the factor story. Here, I believe EQWL is ahead of OEF as well as IVV, at least regarding parameters I prioritize.
| Metric | EQWL | OEF |
| Market Cap | $279.8 billion | $1,027 billion |
| EY | 5.497% | 4.270% |
| P/S | 4.19 | 7.4 |
| EPS Fwd | 6.4% | 10% |
| Revenue Fwd | 5.4% | 9% |
| ROE | 48% | 68.7% |
| ROA | 8% | 12.9% |
| Quant Valuation B- or higher | 19.4% | 6.2% |
| Quant Valuation D+ or lower | 60% | 80% |
| Quant Profitability B- or higher | 97% | 98.6% |
| Quant Profitability D+ or lower | 3% | 1.1% |
| 24M Beta | 0.929 | 1.06 |
| 60M Beta | 0.98 | 1.045 |
Calculated using data from Seeking Alpha and the fund; holdings as of November 12, financial data as of November 14
- Owing to the equal weighting, EQWL has a weighted-average market cap that is almost 4x smaller compared to OEF and about 2.6x smaller compared to IVV.
- A smaller market cap together with a supportive sector mix inevitably translates into better valuation, and the EQWL portfolio illustrates that vividly. For instance, an almost 5.5% earnings yield looks more than healthy. Even though a 4.2x Price/Sales is outside my personal comfort range, it is still much more appealing than a 7.4x ratio, which OEF has owing to MSFT, NVIDIA (NVDA), Eli Lilly (LLY), and other bellwethers with double-digit P/S.
- Most importantly, 19.4% of EQWL’s holdings have a Quant Valuation rating of B- or higher. This is an exceptional result for a mega-cap portfolio.
- As my long-term readers most likely remember, in my notes, I typically point out that attractive valuation frequently comes together with only average or below-average profitability. But this is not the case with EQWL, which has one of the largest allocations to the top-quality stocks I have seen to date, 97%. And this is just 1.6% lower compared to OEF.
- Another indication of high quality is that outside the financial sector, all its holdings have had positive last twelve months net operating cash flows.
- On the negative side, regarding capital efficiency, I would not trust its overinflated ROE, distorted by the contributions from debt-heavy Home Depot (HD), Booking (BKNG), Colgate-Palmolive (CL), and AAPL. At the same time, OEF has an even larger ROE, majorly thanks to AAPL.
- I am also not impressed with Return on Assets, as I would prefer a figure closer to 10% or even above it.
- Besides, EQWL should appeal to investors who would like to maintain exposure to U.S. bellwethers in a less volatile portfolio, thanks to both 24-month and 60-month beta coefficients below 1.
- Nevertheless, a nice combination of comparatively appealing valuation and low volatility expectedly comes with rather soft growth, with both forward EPS and revenue growth rates only in the mid-single-digits vs. OEF’s double- and high-single-digits.
Performance: a place a little bit safer to be during downturns
Even though during the July 2019–October 2023 period EQWL delivered a lower annualized return compared to both IVV and OEF, predominantly because it was less successful during the pandemic market rally, it still solidly outperformed GSEW and the Invesco S&P 500 Equal Weight ETF (RSP), beating them by 2.11% and 3.07%, respectively. Another advantage is that its decline during the 2022 bear market (11.47%) was not as deep compared to all the selected peers, even the smart beta ones.
| Portfolio | IVV | EQWL | RSP | OEF | GSEW |
| Initial Balance | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
| Final Balance | $15,307 | $14,809 | $13,610 | $16,239 | $13,088 |
| CAGR | 10.32% | 9.48% | 7.37% | 11.84% | 6.41% |
| Stdev | 18.55% | 18.72% | 20.64% | 18.50% | 19.97% |
| Best Year | 28.76% | 27.70% | 29.41% | 29.18% | 24.78% |
| Worst Year | -18.16% | -11.47% | -11.62% | -21.02% | -17.55% |
| Max. Drawdown | -23.93% | -21.84% | -26.65% | -25.07% | -24.77% |
| Sharpe Ratio | 0.53 | 0.48 | 0.36 | 0.61 | 0.32 |
| Sortino Ratio | 0.81 | 0.75 | 0.54 | 0.93 | 0.48 |
| Market Correlation | 1 | 0.97 | 0.96 | 0.98 | 0.98 |
Data from Portfolio Visualizer
Other parameters I would like to highlight are the downside and upside capture ratios.
| Metric | EQWL | IVV | OEF | RSP | GSEW |
| Upside Capture Ratio (%) | 95.12 | 100.83 | 104.96 | 96.24 | 93.39 |
| Downside Capture Ratio (%) | 93.94 | 97.08 | 96 | 103 | 103.51 |
Data from Portfolio Visualizer
An unquestionable advantage of EQWL here is that even though its upside capture ratio is smaller compared to its closest peer RSP, it has slightly better immunity to bear markets than all the selected counterparts, as illustrated by the downside capture ratio of just 93.94%.
Final thoughts
EQWL is a smart-beta investment vehicle that will more likely appeal to investors who are somewhat skeptical about the $1 trillion league and would like to have larger exposure to old-economy bellwethers, like banks and manufacturing giants. The weighting schema of its underlying index made the issue of U.S. overvaluation a bit less acute, and, most importantly, it was achieved without compromising on quality. Among its weaknesses is the expense ratio of 25 bps, which looks rather burdensome for a simplistic strategy, at least for my taste. Another disadvantage is a too-small upside capture ratio and too-small exposure to the growth factor compared to its peer OEF.
