The technology sector is the best-performing group in the S&P 500 and large- and mega-cap stocks, such as Apple Inc. (NASDAQ: AAPL), Google parent Alphabet Inc. (NASDAQ: GOOG) and Facebook Inc. (NASDAQ: FB), are primary reasons the sector is soaring.
Although many of the sectors largest components are delivering impressive performances this year, investors should not overlook equal-weight strategies, including the Guggenheim S&P 500 Equal Weight Technology ETF (NYSEARCA: RYT). RYT, which recently turned 11 years old, tracks the S&P 500 Equal Weight Information Technology Index.
Despite diminutive weights to the aforementioned tech titans, RYT is up 32.5% year-to-date and offering slight out-performance of cap-weighted rivals, such as the Technology Select Sector SPDR Fund (NYSEArca: XLK), the largest tech ETF.
XLK tries to reflect the performance of the Technology Select Sector Index, which is comprised of technology and telecom sector of the S&P 500. The ETF includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services. Top holdings include Apple, Microsoft (NasdaqGS: MSFT) and Facebook.
“This year, the capitalization-weighted Technology Select Sector SPDR Fund (XLK) has lagged its equal-weighted counterpart, the Guggenheim S&P 500 Equal Weight Technology ETF (RYT). But not during earnings season,” according to Bloomberg. “Why? Because Apple Inc., Microsoft Corp., Facebook Inc. and Google parent Alphabet Inc. make up almost 40 percent of the cap-weighted fund. So when those tech giants beat their earnings estimates, XLK outperforms RYT, where the same companies make up less than 6 percent of the portfolio.”
RYT also reduces the potential for single-stock risk. The ETF “reduces bias toward the largest companies in the technology sector, providing broad exposure to achieve attractive risk-adjusted performance results,” according to Guggenheim. “To maintain an equal weight focus, the fund systematically reallocates from outperforming to underperforming stocks and market segments, which may provide an opportunity to improve long-term performance.”
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None of RYT’s 69 holdings account for more than 1.78% of the ETF’s weight. The $1.5 billion ETF allocates over 24% of its weight to IT services providers and nearly 24% of its weight to semiconductor firms.
“Most of the growth opportunity within technology is not really in the Googles and the Apples because their market cap is so huge. You’re going to get better bang for your buck in mid-cap or smaller companies,” said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago, in an interview with Bloomberg.
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of Apple, Facebook and Microsoft.