This ETF Should Be Crushing the Market. Here's Why It Might Finally Be About To

The whole purpose of exchange-traded funds is to give investors easier access to a basket of different stocks in a single investment vehicle. When ETFs have a sizable chunk of their assets invested in just a handful of different stocks, it undercuts their usefulness for investors. At some point, when an ETF gets too concentrated, you might as well just go out and buy the individual stocks with the largest positions and call it good.

The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) sought to solve this problem by offering an alternative to market capitalization-weighted ETFs that were getting increasingly concentrated in a small number of top holdings. By owning all 500 of the component stocks in the S&P 500 in roughly equal amounts, the Invesco ETF made every single stock a potentially meaningful contributor to the fund's overall return. That not only made the fund more diversified but also theoretically gave it a more favorable performance profile. In this second article in Voyager Portfolio's three-part series on the Invesco ETF, we'll see how the fund has actually performed compared to the broader market.

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Looking for a performance pattern

When you look at the performance of the Invesco S&P 500 Equal Weight ETF in comparison to traditional index ETFs, it's tempting at first to conclude that it's another example of a fund that adds ballast and reduces volatility at the expense of potential return. For instance, in the up years of 2023, 2024, and 2025, the Invesco ETF produced positive returns. However, those returns lagged behind those of a market-cap-weighted fund by considerable margins: 12 percentage points in 2023 and 2024 and more than six percentage points in 2025. By contrast, in the most recent major bear market in 2022, the fund lost money, but it beat the broader S&P by nearly seven percentage points.

However, look back further and correlations aren't as clear. In the bull-market year of 2021, the Invesco ETF actually topped the S&P 500. Meanwhile, in 2018, a weak year for the broader market, the Invesco ETF had even worse losses, falling about 8% compared to a loss of between 4% and 5% for the S&P.

Over longer periods of time, the Invesco ETF has failed to live up to its expectations. Average annual returns for the past decade trail by nearly three percentage points at 11.47%. Over 15 years, the Invesco ETF again lags behind the broader S&P 500, 13.43% to 11.35%. A different of just two or three percentage point might not seem like a lot, but the power of compounding comes into play over these longer periods of time.

Same index, different exposure

One reason behind the underperformance of the Invesco ETF is that the sector exposure of the equal-weight fund differs from that of a market-cap-weighted fund. The Invesco fund has only 16% of its assets invested in technology stocks. That compares to about 34% for the market-cap-weighted ETF. Allocations to communication services stocks are similarly higher in the market-cap-weighted fund, largely because some companies that most investors see as tech giants technically get classified into other areas.

By contrast, in defensive sectors like consumer discretionary, healthcare, and utilities, the Invesco ETF has upsized allocations. That adds diversification, but it has detracted from performance considerably over the past several years.

Can Invesco S&P 500 Equal Weight ETF bounce back?

It's tempting just to dismiss a fund that can't keep up with the broader market in terms of performance. However, sometimes, an ETF that does poorly in certain market conditions recovers and does better in different conditions. In the final article of this three-part series for the Voyager Portfolio, you'll get some insight into whether the Invesco ETF's prospects might turn around in the near future.

Dan Caplinger has positions in Invesco S&P 500 Equal Weight ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.