Strategic Thinking With Equal-Weight ETFs

The debate surrounding smart or strategic beta or alternative indexing is not limited to terminology. That debate has, well, sparked other debates, including whether or not equal-weight exchange traded funds fit the bill as smart or strategic beta offerings.

Guggenheim Managing Director Bill Belden believes equal-weight ETFs should be considered in the strategic beta conversation. Belden ought to know because Guggenheim is one of the largest purveyors of equal-weight ETFs, including the $8.9 billion Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), one of the marquee equal-weight products from any fund provider.

“We do position equal-weight as smart/strategic beta,” said Belden in an interview with ETF Trends from the Morningstar ETF Conference in Chicago. “When comparing RSP to a cap-weighted S&P 500 fund, it’s hard to say RSP is not smart or strategic beta.”

As has been noted many times in the past, RSP has a legacy of outperforming cap-weighted S&P 500 funds. Since the March 9, 2009 market bottom, the Guggenheim offering has surged 312.3% compared to 232% for cap-weighted rivals. [Get Tactical With ETFs]

However, as Belden acknowledges, RSP is not a free lunch because with those higher returns has come modestly higher volatility.

“It is incumbent upon sponsors like us to educate advisors and investors about the higher risk/reward profile with equal-weight ETFs,” added Belden.

While equal-weight ETFs have been more than legitimized over the years, some critics allege that the advantages of these products are solely tied to deeper exposure to small-caps and/or value stocks. However, Belden shed some light on an oft-overlooked driver of returns to equal-weight ETFs: Rebalancing. Efficient rebalancing of equal-weight ETFs, either sector or broad market funds, not only drives returns, but also helps these ETFs steer clear of concentration risk. [How to Evaluate ETFs]

Guggenheim also features a lineup of nine equal-weight sector ETFs, several of which have proven their mettle at times when avoiding single-stock risk has been prized by investors.