The Invesco S&P 500 Equal Weight ETF (RSP) surged to a record high on Monday as investors focused on the upcoming Federal Reserve interest rate decision. The fund jumped to a high of $176.55, continuing an uptrend that started on September 11.
RSP is seen as a better S&P 500 alternative
The S&P 500 index is one of the most popular funds in Wall Street since it tracks the biggest companies in the United States.
It was established in 1957 when it was trading at $386, which, adjusted to inflation is worth about $4,071 today.
The fund is made up of 500 companies, which it ranks in terms of market cap. As a result, it is often highly concentrated in the tech industry. Tech stocks account for 32% of the fund followed by financial services, healthcare, consumer cyclical, and communication services.
As a result, large companies like Apple, Microsoft, Nvidia, Amazon, Meta Platforms, and Alphabet have a big role in the fund. The top-ten companies account for about 34% of the fund, making it relatively risky.
The S&P 500 index does well in good times for technology companies. It then underperforms the market when these companies are not doing well. However, since tech has done well in the last decade, the fund has done much better than other ETFs.
The Invesco S&P 500 Equal Weight ETF solves the concentration problem by ensuring that all companies in the fund have an equal weight. As a result, the fund often tilts towards smaller companies in the S&P 500 and reduces risks.
Unlike the S&P 500 index, the RSP fund is mostly made up of industrials, financials, technology, healthcare, consumer discretionary, and consumer staples. Industrials account for 15.8% of the fund while financials, tech, and healthcare account for 14.9%, 12.5%, and 12.5%, respectively.
The biggest companies in the RSP ETF are Kellanova, Mohawk Industries, DR Horton, CBRE Group, Fair Isaac Corp, Globe Life, GE Vernova, and Iron Mountain.
Kellanova, formerly known as Kellog, will exit the fund soon as it was recently acquired by Mars in a $36 billion deal. Mohawk Industries is the biggest flooring company in the world, with a big market share in carpets, tiles, countertops, and wood flooring.
DR Horton is a large restaurant brand while CBRE Group is a leading commercial real estate services provider. The other notable company is Iron Mountain, a REIT that focuses on data storage and data centers.
The impressive stock market rally is no longer about a handful of tech stocks.
Per Bloomberg, the S&P’s equal-weighted version — one that gives Target Corp. as much clout as Microsoft Corp. — hit a record high.”
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Catalysts for the RSP ETF
There are a few catalysts that could push the RSP ETF higher in the coming years. First, historically, while the RSP fund has lagged behind the S&P 500 index, it has done well. Its stock has jumped by 168% from its lowest point in 2020. Excluding dividends, the fund has jumped by 751% since its inception in 2003.
Second, the RSP ETF is relatively cheaper than the other funds that track the S&P 500 index. It has a trailing P/E ratio of 17.9 and a price-to-book ratio of 3.04. The SPDR S&P 500 (SPY) and the Vanguard S&P 500 (VOO) have P/E ratios of 23 and a price-to-book multiple of 4.71.
Third, the fund will likely benefit from the Federal Reserve interest rate cuts, which are set to start on Wednesday. Economists expect the bank will slash interest rates by either 0.25% or 0.50%.
The main headline in the decision will be what the bank officials like Jerome Powell say after the meeting. The expectation is that they will maintain a more dovish tone, meaning that they will point to more rate cuts.
RSP and other stock ETFs do well when the Federal Reserve is cutting interest rates as we saw during the last cutting cycle in 2020 and 2021.
Fourth, the fund will benefit from the strong quarterly financial results by American companies. FactSet estimates that companies in the S&P 500 index will have revenue growth of 4.9% in the third quarter, the fifth quarter of consecutive growth.
There are signs that American companies are doing well, with the number of those mentioning inflation in their earnings calls falling to the lowest point in 2021.
RSP ETF technical catalysts
RSP chart by TradingView
The other catalyst for the RSP ETF is its technicals. On the weekly chart, we see that the fund has been in a strong bull run, and most recently, it crossed the important resistance point at $157.85, its highest point in January 2022 and its previous all-time high.
The equal-weight fund has remained above the 50-week Exponential Moving Average (EMA) while the Average Directional Index (ADX) has moved to 27, meaning that it has a strong uptrend.
Therefore, the fund will likely continue rising as bulls target the next psychological point at $200.
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