Animal Spirits Podcast - Talk Your Book: Equal Weight Investing

Episode Date: April 28, 2025

On this episode of Animal Spirits: Talk Your Book, ⁠Michael Batnick⁠ and ⁠Ben Carlson⁠ are joined by Nick Kalivas, Head of Factor & Core Equity Product Strategy at Invesco to discuss the research behind equal weighting, concentration within the S&P 500, looking at flows during the selloff in 2025, factor performance, and much more! Find complete show notes on our blogs... Ben Carlson’s ⁠A Wealth of Common Sense⁠ Michael Batnick’s ⁠The Irrelevant Investor⁠ Feel free to shoot us an email at ⁠[e-mail]⁠ with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: ⁠https://www.idontshop.com⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: ⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠ The Compound Media, Incorporated, an affiliate of ⁠Ritholtz Wealth Management⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠https://ritholtzwealth.com/advertising-disclaimers⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by Invesco. Go to Invesco.com to learn more about their equal weight ETF RSP and many, many more ETFs. Invesco.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Annel Spirits with Michael and Ben.

On today's show, we're joined by Nick Kalevis, head of factor and core equity product strategy. So I looked at this up while we were having our conversation, and 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. I knew that it performed really well coming out of the crisis in the dot-com bubble when all the value in small stocks did well. No, it's actually more like, I don't know, 70% in total. So even with the last seven years or so,

so I guess the point is everyone wanted to throw factor strategies out the window, But this one, even with the last cycle of mega caps dominating, has still held up really well. Yeah. That's surprising to me. Big time surprise. It would be interesting to see if the MAG 7 continues to underperform how quickly people will not push it aside, but at least be more open to these other strategies like this. This was a bit of a walk-time memory in this conversation, at least the low volatility part. That was like a big deal back in the day.

It was low-volent. It was high beta. Those were like the big factor ETFs that people spoke about. I do remember. And those ETS would just like take off, right? The Wism Tree had the Japan fund that took off and a little, we had the little Val and all these different factors as they were hitting people, the flows would just be amazing, right?

Yeah. So I guess with the advent of the Fang names, which, what was that coin, 2017 maybe? It's been all about like the Magnificent 7, which I guess is a factor onto itself, but maybe we're entering a different environment, max 7 or down 26% or whatever it is. Everything has its day in the sun. And so today we're talking about the equal weight ETF amongst others. We've gotten to do a ton of factor strategies, right? So many factors.

Yes. And here's our conversation with Nick from Invesco. Nick, welcome to Animal Spirits. Thanks. I'm glad to be here. All right. 2025, after years of client conversations, why am I owning anything other than the Mag 7? Why are we tilting away from the mag seven?

Just give me the mag seven. Don't worry about the other 493. Well, finally, conversations are starting to change. It is April 17th. The mag seven as a group are down 22%. The S&P is down 11. And the equal weight, I mean, still down 9%. Not, you know, not cheering for that,

but a little bit better than the cap weighted index. Are you starting to see flows reflect the dynamic? that I just laid out. We are starting to see some of that. I think we've had very good flows the last couple of years. This year, the flows have started a little bit slow, but this is a strategy that's really top of people's minds. And I think what we are seeing is a lot of volatility in flows, where we have, you know, days where there's big in, and there's some days where there's some big out, and it's kind of very much a function of what's going on broadly in the marketplace. place. For people who are unaware, and this is a, I'm a big fan of simplicity. This is a very simple

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. Yeah. So, well, it's kind of, I think, what you believe you're purchasing when you think about owning an S&P fund. So you literally just take every name of the S&P 500 and equally weight it. And then every quarter, what happens is that those stocks that have risen above their equal weighting, they're paired back to equal weight. And those stocks that are weighted below their equal weight are brought back up to equal weight. And that's 20 basis points per company. And so if you think about, you know, double share class like Google, you know, it would be 10 for

one, 10 basis points for one, 10 basis points for the other. So it's that simplistic. Now, going beyond the simplicity a little bit, it's important to remember that you're getting a little bit of a smaller size tilt up in the S&P 500. So you've got much more exposure down the cap spectrum. So you've got the small size effect. And you actually get a value tilt that's present because you're getting this kind of bi-low, cell high, anti-momenum dynamic that's present every quarter when it's re-weighted.

Nick, I'm sure a common pushback to that, especially over the last couple of years, is, hey, wait a minute, you're watering the flowers and ripping out, I'm sorry, you're watering the weeds and ripping out the flowers, you keep selling the good stuff, I guess high, but you keep adding to the bad stuff low. Is that just a dynamic of the market that we've been in where it's really been a growth momentum market and that's not a permanent state of affairs? I think that is exactly correct. I think 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. And those are kind of the, you know, two very well rewarded factors that have just been kind of lost in this current environment. And I think really the other aspect of that story is when you start to go down the cap spectrum, the market's been a bit starved for earnings. And that's really kind of played out in kind of the 493 or the 490, really being able to keep pace.

So this fund, RSP, the Equalweight Investco SEP for an equal weight ETF, has been around for a very long time, more than 20 years. So it dates back to 2003, which I guess was right towards the end of the original. com bear market. And this surprised me. Since then, so this is 22-ish years or something since the inception of this fund, it's outperforming the S&P. And so that's despite a, I don't know, seven to 10 year window over the last.

cycle where being in the mega, mega, mega caps has performed so well. So why is the performance historically been so much better than I think a lot of people would assume? So 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. That's how I would tend to explain it. I mean, And it's doing something where over time, you're not essentially investing in richly priced stocks. You're kind of taking your profits every quarter and doing that kind of buy, low, sell high. I think that's what really is at work in the strategy.

One funky dynamic of the strategy is that if there are more names in a sector, just by virtue of there being more names in a sector, sorry for repeating that side, that sector would have an overweight. True? It can, but I think, again, the way everything's working out here, you come back to this idea that every quarter you're kind of owning what's, you know, you're adding to what's lag behind, you're trimming what's done well. And so even within that sector, it's going to give you the mechanism to try to capture that value in small size effect that that is present. So I really try to lean on the factors. I mean, we can talk more, you know, tactical. speaking relative to cap weight if we want to go down that road. But I lean heavily on factors.

And I think this is a strategy that is a bit of a gateway into broader factor strategies like quality or low volatility or momentum. It's kind of that introductory way to get your feet wet. I mean, if there was ever a time to lean away from the S&P, given the concentration, you've got this really neato chart, a pie chart, that shows. the weights to the company in the SMP 500, and in the top 100, it's 71% of the overall exposure in the fund and 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 you barely would even feel it. Obviously, the top, the bottom 4 to 500 in the equal weight, it's 20%.

So the conversations have to be easier now. than they were, say, I don't know, five years ago, just given how concentrated the capuated version has become. Yeah, I think that's true. And in fact, I think you see that in the flows that have been present last year and the year before, despite kind of struggling performance because of the dominance of the big names, we still saw a lot of flow and interest.

And people were trying to kind of manage that concentration risk that was present and the valuation stretch has been present. They're more willing to try to, you know, make a more durable portfolio, and equal weight has been a part of that whole process. I mean, I think the other aspect in terms of a lot of our conversation, and people are surprised, when you kind of start to, you know, break the S&P 500 up and you look at performance by decile over time, that smaller decile actually has done a lot better than the larger decile, really to the tune of about 400 basis points.

And that, again, ties you back to the old Fama French, you know, size factor being very, very powerful. So you haven't seen people give up on these other factors in recent years, small caps or value or quality. Have you seen any of that in your flows where people have said, all right, fine, I'm just going to go on. Because we get those questions all the time from people saying, listen, I know the history. I've read all the research reports. I've read all the Fama French stuff. It doesn't work anymore. I'm going all in on large cap tech stocks.

We've heard a lot of that over the years. You haven't seen that in your flows, really? Not particularly. I would say pure value has probably suffered the most. And so what we've seen people do is either go to equal weight or they'll go maybe to revenue weight. They'll try to get a value tilt that has less tracking error and less deep value. We have actually seen in the last few years a pick up an interest in kind of mid-cap factors, A lot more of flow and interest and talk there.

I think a lot of that has been performance related. And it's also related to the fact that factors have been able to kind of flourish more mid-cap because when the companies get big, they graduate up to the 500. So that concentration issue or that concentration headwind that's been so present in the large-cap segment has not been present when you go into mid-cap. Well, does the equal weight end up being like a mid-cap fund, kind of? If you start to look at it from like a Morningstar style box, it will start to look that way. But you still got the S&P 500 there, you know, those large-cap stocks by the definition of S&P. And what has happened is that because there's this concentration, the definition of large-cap is getting eaten up by fewer and fewer names.

And so things kind of everywhere that are not big start to look mid-cap or small-cap. And in fact, we've had a lot of conversations with our clients because what happens is something like RSP will look like it's mid-cap, something that's mid-cap will look at small-cap. And so we have to kind of go through the exercise of reminding them that, you know, the dominance of these names means that fewer and fewer companies are actually mega cap or fewer and fewer names are actually large cap because of the definitions that are used by some of the analytic firms. Are you seeing flows correlated with midcaps or small caps or value or like what tends to coincide in terms? of dollars coming in and leaving with the equal weight of the F? So actually, I think what we're seeing is there's two things that are happening. Probably one, we're actually seeing a lot of flows with revenue weight because you get that value tilt.

You're kind of, you know, breaking some of the linkage between price and weight, but 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 MET or whatever, will drop themselves into revenue weight. So that has been one of the beneficiaries of trying to manage concentration. I think the other thing... Wait, hang on, hang on.

Sorry to cut you off. I want to pause that. You guys have a revenue weighted ETF suite? Yes, we do. Yes, we have a cross-the-depth spectrum. So RWL would be the 500, and that's the one that tends to. to, I think, benefit kind of secondarily from this concentration story. So that's true.

So is that like Walmart and Amazon on the top holdings? You get Walmart's a big holding in there, yes. You go by that, you know, kind of that revenue footprint that's present. Oh, interesting. Are you seeing any big behavioral changes this year with the correction in the market, or is it still too soon to tell anything? I mean, what I would say, what I find most interesting, despite the MAG 7 being, down, we continue to see very good interest in our QQ and our QQM. So we're seeing very strong

flows in the NASDAQ 100, you know, cap-weighted products here. People seem to, you know, think that what's happened in the past is just going to continue to run in the future. So they've actually been kind of using the break to accumulate here, which I think is maybe one of the more surprising dynamics that I see in the marketplace. That's probably, something that surprised me most. So people are buying the dip. To what it looks like, if you look at our flows, that's true. Wait, hang on.

Don't question. QQM, this is new to me. So this is a, but this is a $38 billion product, and it's the NASDAQ 100 with a lower share price than the traditional cues. What, why? What am I missing? Yeah, so, okay. So that's a great question.

Let's talk a little bit about that. So we launched that a few years back. And really what QQQM is is an updated 40AC wrapper to access the NASDAQQQQ is a UIT and an ETF. And so there's a couple of differences. One, if you look at QQQ, because of the structure that's present, when Apple pays a dividend or Microsoft pays a dividend, the PM team can't reinvest that. They have to hold the cash. QQQM, they can plow that money back in. And so it more closely tracks the NASDAQ100 index, which in a bull market is great. In a bear market, you probably want a little bit of cash drag. But

generally, the NASDAQ100 has been a very, very strong performing index. So that's been a benefit. Second thing is, in QQQM, we can securities lend in that. Now, there's not a ton of money to be made security lending in large cap. But we can do it. We pass through that income from security lending to our investor. So we obviously have to pay some cost to that. But we pass it through. And so that can help kind of bump up the overall return. And then the third thing is because it's in this kind of updated wrapper, we offer it for five basis points cheaper. So what we've seen happen there is more buying hold types have been interested in QQQM, you know, people who are kind of fiduciary and if they can switch, you know, out of QQQQ, they do go to QQQM if they don't have any tax implications here. And so it's really something that has seen very strong interest there. I think QQQQ, obviously, you know, that's a huge, very liquid fund, has a huge ecosystem that that's present. But QQQQM is really kind of cost. on. You know, what we try to do here at Investco is really provide access to factor investing. So

we are carving up like the S&P 500, for example, in a number of ways. So, you know, we have low vol, we have momentum, we have growth at a reasonable price, you know, we have value, you know, low volatility. And then offering that at the 500, the 400 and the 600. And I think really it gives investors like this ability to build a better portfolio, to, you know, essentially get differentiated returns. And, you know, we're seeing a lot of interest there. SPLV, to me, or for me, I should say, this was the first factor ETF that really caught my eye in terms of being reflective of the market environment. Obviously, you were around back then. In 2013, for example, a much different world than we live in today, that we were still in the zero interest rate environment and people are still very afraid of equities, understandably so.

And they looked to SPLV to get, like they were called bond proxies back in the day, right? You're going to own these boring, staple utility type names. You're going to clip the coupon because, you know, the three plus percent dividend yield was more attractive. at least you've got some equity upside to the extent that there was any and there was versus fixed income. And I guess almost, I don't know, a decade plus later, it's still chugging along over $7 billion in assets. Yeah, I think it really, you know, for investors who are kind of older, they're worried about sequence of return, they want to stay invested in kind of sleep well at night. they're very comfortable with kind of what has been the smoother ride in low vol. I mean, I think if you get a little more wonky and you get deep into the research,

it's actually a very interesting strategy because you're exploiting the low volatility anomaly, which people always kind of like a little bit disbelief. But, you know, when the academics were kind of trying to poke holes in the security markets line and CAPM, they found within an asset class, not between asset classes, the lower risk stocks have tended to outperform the higher risk stocks on kind of a risk adjuster or even outright basis. That was certainly the case for SPLV from kind of the inception in May 11 until essentially the top in COVID. In recent years, we've kind of been in a very big bull market, a very concentrated market, so there's been some headwinds. But what we're seeing in the current

market is, I think, kind of a reexamination of loval and it's starting to get some attention and and flow just to help investors kind of weather the storm. Ben, do you remember this one? In 2012, at the beginning of 2012, it went from a billion dollars in assets up to $5 billion in the spring of 2013. It was one of those like vertical ramps in AUM that all sorts of bloggers were paying attention to. Well, I remember that was also the time when people started figuring out, like, wait a minute,

there was a difference between low vol, which deals with stock prices in Minval, which Nick, you can tell me if I'm wrong, that is more financial statements. Like there's not a lot of volatility in the performance of the business, right? Those are two different things. Yeah, I mean, so MinVal is basically an optimization where, you know, what you do is you kind of look how securities trade against each other, how they correlate for lack of a better term. And then to essentially come up with a commercial product, you have to put constraints on it.

So that's really the difference is one is kind of a portfolio construction, Minval. Low Val, you're actually owning the lowest risk stocks. And so you have a lot more tracking error in Low Val. You tend to get less up capture, less down capture. Minval tends to look much more like the market. Because if you just ran that optimization, you might get 30 stocks and the weight might be really big in two of them. And that's just not really viable. So they put those constraints on them.

So one of the fun structures we get questions about a lot, and I feel like it's probably becoming more popular these days because it is a little more low-val as well is options-based strategies. It seems like a lot of people, because these are still relatively new products, have really taken to these, and they like seeing that income. They like seeing the really high yield that you can put on, you can slap on these things, you know, and you look at the dividend yield because the options-based income is so high. What do you guys have in that space? Yeah, so we did launch some income-advantaged funds. So we're offering that against the NASDAQ-100 in QQA. We have R-SPA. So there's actually one that's done on Equalweight.

And then there's an EFA product there where you're essentially, you know, selling calls, selling goods. They're cash secured. And that is a way to essentially get income using options. And we've tried to do that with kind of our franchise. Guys, obviously, RSP is big and QQQ is big. And so that's, you know, that's where we are in terms of trying to offer that product. Nick, one of the more popular factors that we haven't discussed amongst all the equal weight talk that we've done is the quality factor. I keep repeating myself, I'm a horrible podcast host.

What is it about quality that investors find so attractive? So I would say there's a couple things. So the first thing is just the name quality. I mean, the stocks that are going in there have high return on equity, so they're very profitable. They use their capital very efficiently. So that's one thing that attracts people. I think the second thing is in our lineup, we use balance sheet accruals ratio. So, you know, the bottom line there is we're looking for companies that are actually having cash run through the balance sheet there.

And there's some academic research that indicates that companies, that have low accruals, meaning they have a lot of cash activity, tend to have higher earnings growth, more stable earnings growth. And then we use debt to equity. And so that screen right there, it means you have kind of less interest rate risk, less credit risk. And if you look at kind of the way quality has been constructed here, like if you run through and you go through the methodology, quality has tended to have fairly low tracking error to the S&P 500 and it's tended to sit in that morning star core box or in. So what's happened is a lot of people who have maybe been a little bit apprehensive about the S&P 500 and want to do something

a little bit of different have flocked to quality. And the tracking year of quality has been relatively low. In recent years, you know, it's basically been around three and a half to five percent. So, you know, if it works against you, you're not that, you know, that much a trade. failing. If it works for you, you tend to get a little bit extra performance. And, you know, the bottom line is it also has the flexibility to kind of kick stocks in and out. So there is a mechanism for stock selection that is going on. Your universe there is the S&P 500. So how many stocks are you getting rid of? How many are you keeping, I guess, I should say? It owns the 100. But when you do, it reconstitutes itself semi-annually. So you may.

may drop, you know, 20, 30, you know, at a time or, you know, maybe it's as low as 15. I mean, it will vary depending on what's going on with those underlying screens, you know. So for a while back, it, you know, had dropped out, you know, let's say Nvidia. Invidia is now back in. So it can change with the company's financials. Nick, for people that want to learn more about Investco's equal weight suite of ETFs and all of the other factors and the factors that we didn't get to today, where do we send? them. Yeah, just good. What's your social security number? Yeah, it's going to say, just go to

investco.com. I mean, you could probably Google RSP and it would come right up, so plenty of information on our website. Thanks, Nick. Thank you. Okay, thanks to Nick. Remember check out Invesco.com to learn more. Email us Animal Spirits at the compound news.com. Investors can gain exposure to the S&P 500 Equalweight Index through the Invesco S&P 500 Equalweight ETF, that's ticker RSP. Invesco also offers the Invesco S&P 500 equal weight tax-optimized SMA.

These offerings provide investors with the optionality to tailor their investment approach to their specific goals. For more information, please visit investco.com.