While not as large as their cap-weighted counterparts, some equal-weight ETFs have proven popular with investors over the years. More importantly, some equal-weight ETFs outperform their cap-weighted rivals. The Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), the king of the equal-weight ETF space, has consistently outperformed the S&P 500.
On a sector-by-sector basis, RSP is spread more evenly than the S&P 500 with a sector breakdown that includes consumer discretionary 16.8%, finanicals 16.3%, information technology 13.8%, industrials 11.8%, health care 10.6%, consumer staples 8.6%, energy 8.3%, utilities 6.3%, materials 4.7% and telecom services 1.4%. [Equal ETF Consistently Outperforms S&P 500]
What about an ETF that equal weights the S&P 500 by sector? The Alps Equal Sector Weight ETF (NYSEArca: EQL) is that fund and this ETF proves that equal weighting works at the sector level. EQL’s largest sector weight is 11.5% to health care and its smallest sector allocation is 10.5% to utilities. EQL is rebalanced to equal weights at the end of each quarter. Telecommunications is not broken out as its own sector in EQL. [ETF Chart of the Day: Alps Equal Weight Sector ETF]
Like RSP, its larger equal-weight counterpart, EQL has at various points during its almost five-year history outpaced the S&P 500. One reason for that may be that big swings in sector allocations in the S&P 500 can reduce diversification and increase volatility. Most investors only look at the weights of the benchmark U.S. index today, but there was a time (2005) when financials accounted for 21.3% of the index. That compares to 16.7% today.
In 1980, energy represented over 28% of the S&P 500 and in 1970 utilities accounted for 7.5% of the index, according to Alps data. The weights for those sectors are not even close to half the aforementioned numbers today.
EQL’s holdings consist of the nine sector SPDR funds. The largest holding is the Health Care Select SPDR (NYSEArca: XLV), but in aggregate, EQL’s largest equity holding works out to be Exxon Mobil (NYSE: XOM). The Alps offering tracks the Bank of America Securities-Merrill Lynch Equal Sector Weight Index.
The differences between cap-weighting equal-weight by stocks and sector equal-weighting were on display in May. EQL lagged both RSP and the S&P 500, indicating that the equal-weight sector fund was hampered by an allocation to the utilities sector that is more than triple that of the S&P 500’s. [Interest Rates Dim Utility Sector ETFs]
That highlights a potentially interesting, though still hypothetical scenario. Assume that staples, health care and utilities fall out of favor as financials, discretionary and technology lead a cyclical rotation. That would create a draw in EQL, leaving energy, industrials and materials to determine the ETF’s fortunes.
For those keeping score at home, EQL has topped four of the sector SPDRs while trailing five this year.
Alps Equal Sector Weight ETF
ETF Trends editorial team contributed to this piece. Tom Lydon’s clients own shares of RSP.