The iShares MSCI USA Equal Weighted ETF (EUSA) is a passively managed fund that tracks the MSCI USA Equal Weighted Index, having done so since September 2015. Many equity investors have expressed concerns, especially since the pandemic, about the market rally's lack of breadth. They observe that a small number of prominent companies are primarily driving the market's growth. In this context, EUSA could be seen as a solution to address the valuation and concentration issues present in traditional market-cap-weighted indices like the S&P 500.
EUSA indeed offers structural advantages. It boasts an average market capitalization that is approximately 11.45 times lower and a significantly reduced price-to-earnings (P/E) ratio compared to the iShares Core S&P 500 ETF (IVV). However, despite these theoretical benefits, EUSA has shown surprising drawbacks. Since the implementation of its index change in 2015, EUSA has not only consistently underperformed IVV but has also demonstrated higher volatility and experienced more severe maximum drawdowns. This suggests that while it mitigates some risks, it introduces others, failing to deliver superior risk-adjusted returns.
Given these findings, it is reasonable to question the viability of EUSA as a direct substitute for the S&P 500, particularly for investors concerned about the stretched valuations of the S&P 500. Although EUSA's equal-weighting methodology aims to diversify away from large-cap dominance and potentially reduce valuation risk, its historical performance data indicates that it has not effectively translated these structural advantages into better returns or lower overall risk. Investors seeking alternatives should carefully consider these performance discrepancies.
Ultimately, making informed investment decisions requires a thorough understanding of all underlying factors, including market dynamics, fund performance, and risk profiles. While the appeal of an equal-weighted approach to counter market concentration is understandable, the historical performance of EUSA against IVV highlights the complexities and often unpredictable nature of market behavior. Investors must look beyond superficial appeal and delve into comprehensive analysis to truly uncover value and manage risk effectively. This diligence ensures that investment choices are grounded in reality rather than mere assumption, fostering a more resilient and successful portfolio strategy.