INTRODUCTION
Equal-weight indices have historically had many benefits, notably long-term outperformance—largely driven by exposures to small size and value, along with their associated risk premia—as well as reduced concentration in the largest names. However, in accessing these factors and reducing concentration, the S&P 500® Equal Weight Index elicited some undesirable ESG consequences.
With many market participants seeking to integrate ESG considerations into their portfolios, we ask whether it is possible to reap the benefits of equal weighting while incorporating ESG criteria. This raises three sub-questions.
- What ESG outcomes could be gained relative to the S&P 500 Equal Weight Index?
- Can the factor exposures associated with equal weighting be gained within an ESG framework?
- Can we reduce concentration in a few names, while excluding companies that are undesirable from an ESG standpoint?
Over the back-tested history, both the S&P 500 Equal Weight ESG Index and its higher-conviction counterpart S&P 500 Equal Weight ESG Leaders Select Index reduced exposure to many undesirable business activities and displayed a range of ESG improvements, while having similar factor exposures and reduced concentration relative to cap weighting. The result: a comparable pattern of returns relative to the S&P 500 Equal Weight Index, while adopting an ESG framework.
