As the tech stock Apple (NasdaqGS: AAPL) has passed the $600 billion market capitalization threshold, some investors may be questioning the vulnerability of the recent performance. Exchange traded funds taking on an equal-weight indexing approach could be an answer for those questioning the effect that a falling Apple could have upon the broad market.
“We have a number of rules to avoid value traps. Among the most important are to not buy companies that are reporting losses and to have a large number of stocks in a portfolio that are equally weighted, to take the sting out of a devastating earnings surprise or other setback for any one company. I recommend equal-weighting of a large portfolio–at least 100 stocks and possibly more. Such portfolios over time have significantly outperformed the market,” Adam Zoll, assistant editor for Morningstar wrote in a recent article. [ETF Spotlight: Equal Weight S&P 500]
Shares of Apple have risen about 50% year-to-date, which in turn, has lifted the S&P 500 Index about 9%. Investors may be questioning the outsized affect that falling shares of Apple would have upon the broad market. [ETF Chart of the Day: Technology Sector]
Sam Stovall, chief equity strategist for S&P Capital IQ, reports that there is a way to stay neutral to market events such as the aforementioned. An equal-weighted index can “level the paying field by removing the skewing effects of mega-cap stocks.”
ETFs have allowed investors to construct portfolios of equal weighted indices with a domestic or global approach. Moreover, some of the indices are concentrated in a certain asset class, allowing targeted diversification.