'It's a great diversifier… Not only for clients who use market cap traditional indices, but also for clients who have stock portfolios and use basket of stocks,' says head of ETFs at Invesco Canada
As markets continue to face persistent turbulence and sector imbalances, a growing number of Canadian investors are rethinking the way they gain exposure to equities.
Pat Chiefalo sees the shift toward equal weight ETFs not just as a trend. Rather, a response to structural risk embedded in traditional strategies. He sees equal weight ETFs as a direct counterbalance to a growing structural problem in equity benchmarks: extreme concentration risk. As he explained, the dominance of a few mega-cap stocks in cap-weighted indices has reached levels that raise red flags for portfolio construction.
“There's been an increase in concentration risk of a fewer, smaller companies representing a large proportion of market cap weighted benchmarks,” said Chiefalo, head of ETFs & Indexed Strategies at Invesco Canada, emphasizing that it’s a development that’s been evident across global markets for several years now. One that's even prompting both institutional and retail clients to seek better risk balance in their portfolios.
For some, these ETFs serve as a permanent component of their equity allocation. Others take a more reactive approach, increasing their exposure when concentration levels rise.
“We see clients either have a permanent hold to help manage that risk or give an increasing allocation to that equal weight suite,” he said. “The way we think about and use equal weight is that it’s a great diversifier for those type of portfolios, not only for clients that leverage and use market cap traditional indices, but also for our clients who have stock portfolios and use basket of stocks. If you're using some of those stock portfolios, there certainly is the possibility that you could have some meaningful concentration risk there, especially if you are in Canada. You're going to be exposed to some of our key sectors.”
Unlike traditional cap-weighted indexes, which can become dominated by a handful of high-performing names, equal weight ETFs assign the same weight to each stock in the index. Chiefalo believes this structural difference offers significant advantages.
“It really helps dial down that individual security exposure,” he added.
He points to the S&P 500 as a prime example, noting the top five stocks have represented anywhere between 15 to 30 per cent of the entire benchmark. He emphasized that equal weight strategies serve a dual purpose: not only reducing exposure to any single company but also rebalancing sector weights that have become distorted.
In recent years, that’s meant dialing down exposure to tech, which has grown disproportionately in traditional benchmarks.
“You still get all the same names,” he said, “but you have a dialed down risk concentration to that particular sector, and you normalize it out quite a bit.”
He also noted a distinct pattern among clients who build portfolios from individual stocks. Because these investors often hold a smaller, curated list of names rather than replicating a broad benchmark they can inadvertently concentrate their exposure.
To offset this, many are layering equal weight ETFs into their strategies. This evidently allows them to maintain diversification across sectors while avoiding overreliance on a handful of stocks.
Beyond diversification, equal weight ETFs tend to tilt portfolios toward smaller and mid-cap stocks, companies typically overlooked in top-heavy indices but often available at more modest valuations. Chiefalo said that this tilt can help smooth volatility and mitigate some of the unexpected shocks that have rattled markets in recent months.
In his view, “a more moderated risk portfolio” built on a foundation of broader exposure is increasingly resonating with clients facing an unpredictable investment climate.
Equal weight strategies also naturally tilt toward smaller and mid-cap names, which Chiefalo noted often comes with lower valuations. And lower valuations, in turn, can sometimes help reduce overall portfolio volatility, particularly as the market faces an environment filled with what he calls “exogenous risks” that can slam into a sector or company without warning.
That’s why he’s seen the appetite for equal weight strategies grow alongside market concerns, particularly in Canada where equity exposure is often concentrated in a few dominant sectors.
“It's been the key tool,” he noted. “When you run it equal weight, you tend to lean more towards value, more towards small cap.”
However, he’s also quick to acknowledge the trade-offs, noting market dynamics can sway the performance of different indexing strategies over time. While equal weight ETFs have delivered strong long-term results, he concedes they don’t always outperform.
“When you get those big run-ups in momentum names that are closer to the top five, you're going to get market cap weighted benchmarks. They're going to see that outperformance and that’s because they’re getting that run up in that market,” he said.
While equal weight may lag in those moments, he’s quick to underscore that’s precisely when risk is building and why more investors are using equal weight to hedge.
For Canadian investors, the appeal lies in the diversification. Chiefalo sees equal weight ETFs being deployed in multiple ways, from permanent portfolio allocations to tactical hedges. That also includes clients who own concentrated baskets of individual stocks.
Asked whether specific sectors are seeing heavier usage of equal weight, he’s hesitant to single any out, emphasizing the value of the equal weight product is that “it helps distribute the exposure across the various sectors,” he said.
And while some investors might still hesitate, Chiefalo insists performance and relevance are on equal weight’s side.
“We don't see a lot of hesitance,” he said. “The rationale regarding diversification and risk mitigation really resonates with clients.”
