There is a good reason why investors love index funds. It’s easy to diversify with them, and they usually have low costs. For investors who are willing to wait, broad index funds might do better than most actively managed funds. This is because actively managed funds cost more and it’s hard to regularly pick portfolios that beat the index.
But since the S&P 500 SPX 0.90% has returned 36.4% over the past year as of September 30, most warnings to investors are about two things.
The first one is value. The index trades at a forward price-to-earnings ratio of 21.6, based on the last trading day’s prices and the average earnings-per-share predictions of analysts surveyed by FactSet. That’s more than the 10-year average forward P/E of 18.3, which is higher than the forward P/E of 18 that was used a year ago.
The second scare is about how concentrated the U.S. large-cap benchmark index is. Based on market value, the S&P 500 is weighted. There were 20% of shares in Apple Inc. (AAPL 0.50%), Microsoft Corp. (MSFT -0.12%), and Nvidia Corp. (NVDA 1.68%) on Monday in the SPDR S&P 500 ETF Trust SPY 0.91%, which is the oldest and biggest exchange-traded fund that tracks the index.
The S&P 500’s weighting by market cap rewards success, but it can also lead to an index fund’s investors having more of their money concentrated in a handful of stocks than they might realize.
The S&P 500 has different weighting and selection
Allocating evenly is a clear way to fight back against a cap-weighted index. The Invesco S&P 500 Equal Weight ETF RSP 0.78% is rebalanced every three months because share prices change every day. The fact that all companies are given the same weight makes the value tilt stronger. This is because the technology giants at the top of the index, like Nvidia, which has very strong sales growth, are all given the same weight, even the companies that are growing very slowly. This leads to different levels of success. In 2022, SPY went down 18.2%, but RSP only went down 11.6%. But when SPY came back with a 26.2% gain in 2023, RSP went up 13.7%.
For different weightings than the S&P 500, Invesco has a number of other options. They also have factor-based techniques to track indexes that pick from within the index.
To compare long-term success, we only looked at Invesco S&P 500 Factor ETFs that have been around for more than five years. Not only did we look at how the factor ETFs did against SPY, but we also looked at how they did against the Vanguard S&P 500 ETF VOO 0.92%, which was launched in September 2010 and manages $509 billion. SPY’s yearly costs are 0.0945% of its average assets under management, while VOO’s are only 0.05%.
The tables below show how SPY, VOO, and nine of Invesco’s factor funds that have been around for more than five years have done over time. The total returns are shown in the first table, and the average monthly returns are shown in the second table.
At the top of each table are the two broad S&P 500 index funds. The Invesco S&P 500 Quality ETF comes next because it is the only factor ETF that has been around for more than 15 years. The list is then put in order by five-year results.
If an ETF’s return was higher than SPY and VOO during a certain time period, that number is in bold.
Over the past 15 years, the Invesco S&P 500 Quality ETF SPHQ 0.56% has done the best. It beat SPY in all time periods and beat VOO in all time periods except for the one-year period ending September 30, 2017. The 100 best stocks in the S&P 500 are held by SPHQ. These stocks got the best quality score based on returns on equity, debt to book value, and a “accruals ratio” of working assets to total assets. S&P Dow Jones Indices takes care of the indexes for all of these ETFs. This fund’s index is rebalanced twice a year, and other changes are made right away when a company is spun off or taken out of the S&P 500. The weight of each stock is equal to the sum of its quality number and its market capitalization. Morningstar gives SPHQ five stars, which is the best rating possible for a “U.S. Blend Large Fund.” It has a cost ratio of 0.15%.
The Invesco S&P 500 Momentum ETF SPMO 1.53%, which was launched in October 2015, is the other one of these S&P 500 factor ETFs that has done particularly well. For the one, three, and five years ending September 30, it did better than SPY and VOO. At the moment, this fund owns 99 stocks of companies with the best “momentum scores.” The parts of the S&P 500 are ranked every six months by how much their prices have gone up in the past year. The rankings are then scored to take fluctuations into account. The portfolio is made up of the 20% of S&P 500 companies with the best scores. The weights are based on a mix of the momentum score and market capitalization. The financial information company Morningstar also gives this fund five stars in their “U.S. Fund Large Growth” category. Its cost-to-income ratio is 0.13%.
Nick Kalivas, who is in charge of Atvesco’s factor plan for exchange-traded funds, says that these factor ETFs “will shine most brightly during different parts of the economic cycle.”
In an interview with MarketWatch, he said that one of the best things about the S&P 500 Momentum ETF was that it might be less affected by broad market trends because it mostly holds stocks that have done well recently.
He also said that using more than one tracking method “can be helpful for portfolio management because they work at different times” during the market and economic cycles.
Here’s a summary of the other seven listed Invesco factor funds, leaving them in the same order as on the tables:
- The Invesco S&P 500 GARP ETF SPGP 1.22% follows the S&P 500 Growth at a Reasonable Price Index and owns 76 stocks. It was set up in June 2011 and spends 0.36 percent of its average assets under control each year on costs.
- The Athena S&P 500 Revenue ETF RWL 1.01% owns all 500 stocks, but it ranks them by revenue instead of market value. It was set up in February 2008 and has a cost ratio of 0.39%.
- The April 2023 launch of the Invesco S&P 500 Equal Weight ETF RSP 0.78% marked its start. It has a cost ratio of 0.20%. There are 67 stocks in the Invesco S&P 500 Pure Growth ETF RPG 1.53% right now. It follows the S&P 500 Pure Growth Index, which rates businesses based on how fast their sales and earnings are growing, as well as how fast their prices are moving. The score is put back together once a year and is weighted by Pure Growth Score. This means that the companies in the S&P 500 Pure Growth Index are not the same as the companies in the S&P 500 Pure Value Index. The Russell 1000 Growth RLG 1.10% and Russell 1000 Value RLV 0.77% indexes, on the other hand, have hundreds of companies that are in both of them. RPG was founded in March 2006, and its cost-to-income ratio is 0.35%.
- The Invesco S&P 500 Low Volatility ETF SPLV 0.45% holds 100 S&P 500 stocks whose prices have changed the least over the last 12 months. It is reset every three months. The weights of the stocks in the portfolio are based on the opposite of how volatile their prices are. The fund was set up in May 2011. It has a cost ratio of 0.25%.
- Every six months, the Invesco S&P 500 High Dividend Low Volatility ETF SPHD 0.26% is re-set up. The first cut would be to narrow the S&P 500 down to the 75 stocks that paid the largest dividends over the past year. Then, the list is cut down to the 50 stocks whose prices have changed the least over the last 252 trade days. These 50 stocks are then given a weight based on their dividend return. This fund was set up in October 2012. It has a cost ratio of 0.30%.
- The S&P 500 Pure Value Index, which scores companies by comparing their book value, earnings, and sales to price, is tracked by the Invesco S&P 500 Pure Value ETF RPV 1.27%, which has 94 names in it right now. The score is put back together once a year and is weighted by Pure Growth Score. As of March 2006, RPV was set up and has a cost ratio of 0.35%.
