EUSA: A Suboptimal Choice With Surprisingly Higher Risk, Lower Reward

An analysis of the iShares MSCI USA Equal Weighted ETF (EUSA), designed to mitigate market-cap weighted index valuation and concentration issues, reveals it has surprisingly underperformed its market-cap weighted counterpart since 2015. Despite offering a significantly lower P/E and average market cap, EUSA has delivered higher volatility and deeper drawdowns, leading to the conclusion that it is not a viable alternative for investors concerned about S&P 500 valuations.

Analysis

The iShares MSCI USA Equal Weighted ETF (EUSA) was introduced as a potential solution to address concerns regarding the S&P 500's market breadth and the valuation/concentration issues prevalent in market-cap weighted indices like IVV. EUSA indeed exhibits a significantly lower weighted average market cap, approximately 11.45x lower than IVV, and a much lower P/E ratio, aligning with its objective to mitigate valuation risks.

However, despite these structural advantages, EUSA has surprisingly underperformed IVV since its index change in 2015. This underperformance is coupled with EUSA demonstrating higher volatility and experiencing deeper maximum drawdowns over the same period, indicating a less favorable risk-return profile.

The analyst's strongly negative sentiment (-0.9 for EUSA) underscores the conclusion that EUSA is not a viable alternative to the S&P 500, even for investors concerned about current market-cap weighted index valuations. The data suggests that the perceived benefits of equal weighting have not translated into superior investment outcomes in the recent past, despite addressing concentration issues.

Key Decisions for Investors

• Investors considering equal-weighted ETFs like EUSA to mitigate market concentration risks should critically assess their historical performance, as EUSA has shown higher volatility and underperformance relative to market-cap weighted indices.
• Despite offering lower P/E multiples, EUSA's higher volatility and deeper drawdowns suggest a less favorable risk-adjusted return profile, warranting caution for those seeking a less risky alternative to the S&P 500.
• While market breadth concerns are valid, the underperformance of equal-weighted strategies indicates that simply diversifying by weight may not be a sufficient or effective solution for outperformance in the current market environment.