Mitigate Concentration Risk With Equal Weight ETF EQL

Interest rates, inflation, and geopolitical uncertainty all pose their own challenges to investors. Perhaps one of the most concerning, however, may be concentration risk. Just about ten companies have contributed outsized returns to markets this year. Names like Microsoft (MSFT) and Nvidia (NVDA), then, pose big risks to portfolios if AI fails to deliver. An equal-weight ETF like EQL can present an option to mitigate that risk.

See more: The Long-Term Case for Equal Weight ETF EQL

The ALPS Equal Sector Weight ETF (EQL), doesn’t equal weight the S&P 500. Instead, it looks to equally-weight sectors of the market overall. That could help given how tech-heavy those concentrated firms are. It invests in SPDR funds like the Utilities Select Sector SPDR Fund (XLU), for example, at just about an equal weight with the other sectors.

The strategy does so by tracking the NYSE Select Sector Equal Weight Index. EQL charges a 25 basis point (bps) fee for its approach. Doing so has helped it reach more than $300 million in AUM. The equal-weight ETF has returned 20.8% over the last year. Since its inception, it has returned 13.4%.

Taken together, it helps present an opportunity to diversify away from significant concentration risk in the S&P 500. As mentioned above, should AI not meet the very high expectations placed upon it, many of those big firms will see the fallout in their outlooks. Of course, concentration risk alone is not the only factor that threatens the market. Interest rates, inflation, and geopolitical risk all threaten tech, too, in their own ways.

That’s why a defensively-minded, diversification allocation via an ETF like EQL could help. The strategy may seem a bit staid, but its price momentum suggests otherwise. According to YCharts, the strategy’s price has risen above both its 50-day and 200-day Simple Moving Averages (SMAs) which indicates a buy signal and momentum for the ETF.

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