Skip to main content
Welcome to
super saver spring
offer ends april 20
save over $140
Sale ends in
$0.99
per week for 24 weeks
Welcome to
super saver spring
$0.99
per week for 24 weeks
save over $140
// //

Your basic index-tracking exchange-traded fund is one of the greatest investing innovations ever. Buy, hold for decades, build your wealth.

But these index-trackers do have issues, one of which has come to the fore in the stock market rally of the past year. These ETFs use indexes that weigh stocks by market capitalization, which is investment-speak for size. You get a stock’s market cap by multiplying the share price by the number of shares outstanding.

In a bull market, big stocks get bigger and can end up dominating the portfolio of an index-tracking ETF. Example: The S&P 500, an index commonly tracked by ETFs and widely used to measure U.S. stock market returns, was almost 21-per-cent exposed to just five stocks as of March 30 – Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Facebook Inc.

Story continues below advertisement

If these stocks were to soar like they did through much of the past year, an S&P-tracking ETF would do well. But what’s actually happening is that some of these stocks have come off their highs of the past 12 months and weighed down the S&P 500′s results. As a result, the total return for the first two months of the year for this index was a comparatively tepid 1.7 per cent in Canadian dollars.

There’s a way to stay invested in the S&P 500 and avoid this tech-giant dominance. It’s called an equal-weight approach – instead of weighting stocks in the index by their market cap, each is simply given an equal weighting in the area of 0.2 per cent.

The Invesco S&P 500 Equal Weight Index ETF (EQL-T) offers an example of how equal weighting works. It has a 15-per-cent weighting in technology, compared with 27 per cent for the conventional S&P 500. EQL has 10-per-cent exposure to a pair of sectors that could do well as the economy expands – energy and materials. The traditional S&P 500 has about 5-per-cent exposure to those sectors.

EQL’s return for the first two months of the year was 5.1 per cent. For the 12 months to Feb. 28, it was pretty much in step with the S&P 500. For the two years, it lagged by about four percentage points. The reason for EQL’s recent success is that it provides more exposure to value stocks – those that have been undervalued by investors – and less to the high-powered stocks that drove the index last year and now dominate it.

Long-term, a regular S&P 500 index ETF makes great sense as a way to maintain exposure to the U.S. market. Consider the equal-weight approach if you have a shorter-term outlook where you want to keep exposure to stocks but worry about putting money in an S&P 500 dominated by tech stocks that were losing momentum in early spring 2021.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies