Consider an Equal Weight Strategy Amid Renewed Volatility

Capital markets appear content with playing the rate cut waiting game as the S&P 500 continues to rise to new highs. Meanwhile, renewed volatility could make investors reconsider adding an equal weight strategy to their portfolios.

Credit for much of the S&P 500’s gains has been attributed to choice names in the “Magnificent Seven.” Nividia has been one of the beneficiaries of the artificial intelligence (AI) theme that’s creating a lot of buzz.

Higher-for-Longer Interest Rates Narrative

Percolating in the background, however, is higher inflation numbers. That could keep fueling the higher-for-longer interest rates narrative and thus, add more volatility to the markets. The CBOE S&P 500 Volatility Index (VIX) is up almost 12% for the year as prices continued to rise during the month of February.

“U.S. consumer prices remained strong in February, as shown by today’s CPI data, potentially frustrating hopes of a swift pivot to interest rate cuts by the Fed,” Barron’s reported. The report noted that the “12-month core annual reading was 3.8%, slowing from January’s 3.9%. [But it was] a little faster than the 3.7% expected by economists surveyed by The Wall Street Journal and stubbornly above the Fed’s 2% target.”

A stock market that’s been sensitive to inflation news could mean more volatility ahead as the Fed mulls interest rate policy. The S&P 500 weighted heavily in the Magnificent Seven names only increases the sensitivity to volatile market moves.

“The S&P 500 is a market-cap weighted index, which means the highest valued companies make up the largest weights in the index,” Bankrate explained. “Due to the strong performance of a handful of large tech companies, just seven stocks account for nearly 30 percent of the S&P 500, as of February 2024.”

This is where an equal weight strategy can help. Or more specifically, where investors should consider the Alps Equal Sector Weight ETF (EQL).

^VIX Chart

^VIX data by YCharts

Evening Out Risk

EQL accomplishes an equal weight strategy not by allocating capital equally to stocks. It does so with a unique fund-of-funds structure. That means the ETF comprises other ETFs.

EQL tracks the performance of the NYSE Equal Sector Weight Index (NYXLEW). The fund delivers exposure to the US Large Cap Equity market by investing equal proportions in 11 Select Sector SPDRs and rebalances quarterly. This equally weighted exposure to various sectors also means the fund is deeply diversified.

The fund includes ETFs like the Communication Services Select Sector SPDR Fund (XLC), the Technology Select Sector SPDR ETF (XLK), and the Health Care Select Sector SPDR ETF (XLV) to round out its top three allocations. The fund provides investors with total stock market exposure to all sectors while mitigating concentration risk with its equal weight strategy.

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