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Evaluate EQAL for Another Equal Weight Strategy

The Russell 1000 is one of the most widely observed domestic equity gauges. To be precise, the market capitalization-weighted version of the Russell 1000 is widely followed.However, there’s also an equal weight version — the Russell 1000 Equal Weight Index — and it’s accessible via the Invesco Russell 1000 Equal Weight ETF (EQAL B). EQAL’s underlying index “is composed of securities in the Russell 1000 Index and is equally weighted across nine sector groups with each security within the sector receiving equal weight,” according to Invesco.Many equal weight strategies are said to capitalize on the value factor, and some analysts say that’s true of EQAL.EQAL’s “portfolio shows it has maintained a significant underweight position in momentum exposure and quality exposure compared with category peers. Momentum is the premise that stocks that have recently outperformed will continue to do so. With low momentum exposure, the portfolio is holding stocks that managers believe to be undervalued,” according to Morningstar.At the sector level, in terms of value exposure, EQAL is underweight on financial services and consumer cyclical stocks relative to the cap-weighted Russell 1000 while being overweight on industrial and materials stocks. Overall, more than 38% of EQAL’s 1,014 holdings are classified as value stocks across the large-, mid- and small-cap spectrums. Compare that to just over 20% with the growth label.“This strategy tends to hold larger, deeper value companies compared with its average peer in the Mid-Cap Blend Morningstar Category. Looking at additional factor exposure, the managers do not tilt towards or away from high momentum stocks; the current portfolio is as exposed to the factor as other funds,” adds Morningstar.EQAL’s designation as a mid-cap blend is relevant because 55% of its holdings reside in mid-cap territory. Throw in about 22% that are small-caps, and EQAL has the potential to benefit from the size factor — a phenomenon that often boosts broad market equal weight funds.Even with heftier exposure to the smaller names in the Russel 1000, EQAL’s three-year annualized volatility of 24.7% is just 160 basis points ahead of an equivalent cap-weighted ETF. With an annual fee of 0.20% per year, EQAL is also relatively cost-efficient.“Low-cost investments routinely outperform high-cost investments. Thus, assessing cost is a critical step in any investment evaluation. This share class is in the cheapest quintile of its Morningstar Category,” concludes Morningstar.For more news, information, and strategy, visit our Portfolio Strategies Channel.

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