Equal-weight S&P 500 funds return 19% as Mag 7 lags

Equal-weighted S&P 500 ETFs returned 19 percent over the past year, outperforming the cap-weighted index as the Magnificent Seven's dominance fades.

"The equal-weighted S&P 500 is outperforming the main index as the Mag 7 struggle," Barron's reported Aug. 19. "That trend should continue, offsetting any concerns about fund fees."

The iShares S&P 500 Equal Weight UCITS ETF (EWSP) trades at £5.947, up 0.37 percent, with £4.44 billion in assets under management. The strategy has delivered a 13.12 percent year-to-date return and 13.39 percent annualized over three years, according to the fund's published performance data. Beta has fallen to 0.54 over one year from 0.91 over five years, reflecting reduced sensitivity to mega-cap concentration. Tracking error versus the S&P 500 Equal Weighted Index stands at 9.54 percent over one year.

The performance gap matters because the equal-weight approach redistributes exposure across all 500 constituents rather than concentrating in the largest names. With the Magnificent Seven — Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta and Tesla — struggling to sustain prior momentum, investors are rotating into strategies that capture broader market participation. The fund's maximum drawdown over one year was 5.99 percent, compared with 20.78 percent over five years.

The equal-weight strategy's outperformance comes as concentration risk in the cap-weighted S&P 500 has become a growing concern for allocators. The top seven stocks account for a historically elevated share of the index, making the benchmark increasingly dependent on a handful of mega-cap technology names.

The EWSP fund's alpha of 6.17 percent over one year — the excess return relative to its benchmark — reflects the strategy's ability to capture gains from mid-cap and smaller large-cap names that have benefited from the broadening market rally. However, alpha turns negative over longer horizons, at negative 2.96 percent over three years and negative 2.75 percent over five years, suggesting the equal-weight approach has historically lagged during periods of concentrated mega-cap leadership.

Fee gap narrows as returns outperform

The higher fees on equal-weight funds have been a point of debate, as Barron's noted. But with the performance gap favoring equal-weight strategies, the fee differential has become less of a deterrent. The EWSP fund's ongoing charge is 0.15 percent, according to its published documentation.

The fund's correlation to the cap-weighted S&P 500 has declined to 69.54 percent over one year from 90.33 percent over five years, indicating the strategy is increasingly behaving as a distinct allocation rather than a slight variation on the benchmark. The capture ratio data supports this: the fund captures 67.54 percent of upside moves over one year but only 8.88 percent of downside moves, suggesting the equal-weight approach offers meaningful downside protection in the current environment.

Can the trend hold?

The sustainability of equal-weight outperformance depends on whether the Magnificent Seven's underperformance persists. If mega-cap technology names regain leadership, the cap-weighted index could close the gap. But if the broadening of the market continues, equal-weight strategies stand to benefit from exposure to the full breadth of the S&P 500.

The fund's risk-adjusted returns support the case: a Sortino ratio of 2.20 over one year and 1.06 over three years indicates strong downside protection relative to return generation. The information ratio of negative 0.06 over one year suggests the strategy is tracking close to its benchmark on a risk-adjusted basis. Since inception, the fund has returned 1,149.26 percent, with a trailing 10-year annualized return of 11.78 percent.

This article is for informational purposes only and does not constitute investment advice.