The Merits of Equal Weighting by Sector | ETF Trends

The ALPS Equal Sector Weight ETF (EQL) has been among the most popular ETFs in ALPS’ lineup in recent months as equal weighting continues to outperform. 

Equal weighted strategies offer enhanced diversification and remove size bias so that individual securities or sectors do not have an outsized impact on the fund. Equal weighting has gained attention recently as the S&P 500 Equal Weight Index, which weights each individual security equally, outperformed the S&P 500 by 2% during the second quarter, maintaining equal weight’s trailing 12-month relative outperformance.

Rather than weighting each individual security equally, EQL takes the unique approach of weighting each sector equally. Each sector of the economy receives equal weight in EQL, a strategy that results in a drastically different composition relative to market cap-weighted products such as the SPDR S&P 500 ETF Trust (SPY).

“This year, advisors have benefitted from an alternatively weighted approach to large cap investing as mega cap growth stocks fell out of favor,” Todd Rosenbluth, head of research at VettaFi, said. “EQL’s more diversified approach, with heftier stakes in energy and utilities and less in information technology, has helped the ETF outperform the S&P 500 Index. Such performance success has added to its appeal.”

EQL is designed to offer more balanced exposure than its market cap-weighted peers, avoiding the potentially adverse impact of rallies or crashes in specific sectors of the economy, according to VettaFi.

EQL uses a fund of funds approach and tracks the NYSE Equal Sector Weight Index, an index comprising all active Select Sector SPDR ETFs in an equal-weighted portfolio. 

These are the Communication Services Select Sector SPDR Fund (XLC), Consumer Discretionary Select Sector SPDR Fund (XLY), Consumer Staples Select Sector SPDR Fund (XLP), Materials Select Sector SPDR Fund (XLB), Energy Select Sector SPDR Fund (XLE), Technology Select Sector SPDR Fund (XLK), Utilities Select Sector SPDR Fund (XLU), Financial Select Sector SPDR Fund (XLF), Industrial Select Sector SPDR Fund (XLI), Health Care Select Sector SPDR Fund (XLV), and Real Estate Select Sector SPDR Fund (XLRE).

EQL has a net expense ratio of 27 basis points.

For more news, information, and strategy, visit the ETF Building Blocks Channel.