With smart or strategic beta exchange traded funds garnering so much attention (and plenty of assets, too), it is worth remembering that equal-weighting is one of the alternatives to traditional market capitalization-weighting that really kick-started the smart beta movement.
The Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), the equal-weight answer to traditional S&P 500 ETFs, has, over the long-term, outpaced cap-weighted S&P 500 ETFs. 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, three is an 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.
In some instances, equal-weight ETFs have taken off at the sector level, including funds such as the Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEArca: RHS).
As the staples sector and the corresponding ETFs have soared in response to investors’ demand for lower beta, less risky assets, plenty of naysayers have continually said the sector is poised for a pullback. However, RHS has continually defied those critics this year.[related_stories]
RSP “has bested the capitalization-weighted fund by 1.8% per year over the trailing decade. While there is roughly 12x as much money allocated to the capitalization-weighted fund, investors in the equal-weighted fund would have ended this period with more than one-quarter more money. This is inclusive of the higher fees on the equal-weighted ETF (40bps) versus the traditional sector fund (14bps),” according to a Seeking Alpha analysis of RSP.
Defensive sectors often trade at premium valuations relative to the broader market and that is certainly the case at the moment with the consumer staples and utilities groups.
However, that does not mean investors should flee richly valued groups such as consumer staples and utilities. In fact, the case for these higher-yielding sectors could be getting a boost as bond markets are pricing in diminishing chances of the Federal Reserve boosting interest rates later this year.
“In an examination of equal-weighting versus capitalization-weighting in the consumer staples sector, we have confirmation that equal-weighting has outperformed through a business cycle,” adds Seeking Alpha.
For more information on the consumer staples sector, visit our consumer staples category.
Guggenheim S&P Equal Weight Consumer Staples ETF
Tom Lydon’s clients own shares of RSP.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.