Equal-weight exchange traded funds have advantages. The popular methodology provides investors with performance potential, diversification and a disciplined rebalancing schedule.
Additionally, particularly in the case of sector funds, equal-weight ETFs mitigate single stock risk, providing a more balanced exposure across a sector’s constituents. The other side of that coin is that when a large- or mega-cap stock in a given sector is leading that group higher, such as Apple (NasdaqGS: AAPL) has been known to do with the tech sector, equal-weight sector ETFs can lag their cap-weighted counterparts. [Equal-Weight ETF Advantages]
“Unlike traditional sector-focused ETFs that are weighted based on the market capitalization of their constituents and can be concentrated in certain top-10 holdings (as we discuss below), equal-weight ETFs hold a roughly identical stake in all constituents and are rebalanced quarterly. To us, the benefit is that it reduces exposure to the sectors’ best performers and limits the mega-cap exposure,” said S&P Capital IQ.
However, in the midst of Apple’s current ascent to a staggering market value of $770 billion, the Guggenheim S&P Equal Weight Technology ETF (NYSEArca: RYT) is more than holding up despite a mere 1.72% weight to the iPhone maker. Year-to-date, RYT is up 3.5%, a solid showing among tech ETFs.
This is the way to look at RYT’s 2015 performance: The ETF has managed to gain 3.5% with just a 1.72% weight to Apple while offering investors tech sector diversity and diminished single stock risk. RYT is not lagging the cap-weighted iShares U.S. Technology ETF (NYSEArca: IYW) by much this year, an impressive feat when considering IYW devotes 20.7% of its weight to shares of Apple.
RYT features some other differences when measured against traditional tech ETFs. For example, the equal-weight tech ETF currently allocates 23% of its weight to the semiconductor industry, more than double the allocation to chipmakers found in theTechnology Select Sector SPDR (NYSEArca: XLK). With theMarket Vectors Semiconductor ETF (NYSEArca: SMH) up 32% over the past year, it is clear RYT’s overweight to semiconductor names is serving the equal-weight ETF well. [Industry ETF Ideas for 2015]
A frequent criticism of equal-weight ETFs is that when these funds do achieve outperformance of their cap-weighted peers, those added returns come by way of heavier allocations to small-cap stocks. In theory, that would mean an ETF like RYT is far more volatile than a rival like RYW. Three-year standard deviations paint a different picture. RYT’s three-year standard deviation of 13.2% is only modestly higher than the 12% found on IYW.
With the benefit of hindsight, that added volatility was a small price to pay for RYT three years ago. Over that time RYT is up 68% compared to a 53.3% gain for IYW. RYT hit a record high earlier Monday. [Getting Tactical With Sector ETFs]
Guggenheim S&P 500 Equal Weight Technology ETF
Tom Lydon’s clients own shares of Apple.