ALPS, an asset manager turned exchange traded fund (ETF) provider, has just launched its second ETF. The new fund employs an equal weighting strategy with the sectors that make up the S&P 500.
The ALPS Equal Sector Weight ETF (EQL) is a fund of funds made up of the nine sectors in the S&P 500, each represented in the ETF by a Select Sector SPDR Fund.
Jeremy Held, director of research at ALPS, says the fund differs from other equal weight strategies, because most equal weight ETFs tend to do their weighting at the stock level.
The fund will start each quarter with all sectors at an equal weight, with each one weighing in at 11.1% of the fund. Throughout the quarter, the weights will shift until they rebalance once again at the next quarter.
The purpose of the strategy is to minimize the risk that one sector can sink an entire ship.
“If you look at the last three major declines in the S&P 500, it all occurs when the largest sector in the market crashed,” Held points out.
For example, technology became 40% of the S&P before the crash. Financials were 24% of the S&P before the market went south.
The benefit of equal weighting, then, is that “you own enough of each sector that if any one goes on a run, you can participate. But you minimize the risk of it becoming too large and crashing,” Held says.
The equal weight strategy came out of the belief that sector risk is the biggest risk investors face these days, even more so than single stock picking. “We found out that it’s more important to avoid the wrong sectors and pick the right ones.”
EQL comes with a 0.55% expense ratio. You can read the full prospectus for the fund here.