On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Alps Equal Sector Weight ETF (EQL) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week, where we examine trending, new, newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth. He’s the head of research at VettaFi. And at VettaFi.com, you’ll find the tools and research you need to make yourself a better and smarter investor in ETFs.
Todd Rosenbluth, it’s great to chat with you again.
Todd Rosenbluth: It’s great to be back.
Chuck Jaffe: Your ETF of the Week is …
Todd Rosenbluth: The Alps Equal Sector Weight ETF. EQL.
Chuck Jaffe: The Alps Equal Sector Weight ETF. Ticker symbol EQL. An interesting pick, because there’s lots to talk about always when you consider equal weighting. But normally we’re talking about equal weighting in an index [like]the S&P 500. Rather than go cap weighted, let’s equal weight the index, and we’ll do better in a broader market. But this is equal weighting sectors.
So let’s talk about this approach and why this approach appeals to you now.
Todd Rosenbluth: Right, so EQL takes the equal weighting approach, instead of an on-the-stock level that the Invesco RSP ETF does. This equal weights the sectors, which means the technology sector is of equal size, roughly 9% of the portfolio. The same as real estate — which is a relatively small sector typically — and financials and healthcare. And I won’t name all of them.
But we’ve seen the technology sector drive the market higher. It’s become a much larger weighting overall. Now, part of that is individual stocks. But the collection of those stocks have risen. So instead of having just two or 20 basis points in each individual stock, you’re getting 9% across the sectors. That still means Apple and Microsoft and Nvidia are driving your technology exposure.
Companies like Berkshire Hathaway and JPMorgan are driving your financial exposure. But you’re spreading that sector risk around. We think this is a nice middle ground for folks that don’t want to go too far, too fast in these very small positions in some of those heavyweight companies. Investors might want to reduce the risk of one individual company or one individual stock being too big in the overall portfolio.
Chuck Jaffe: Without getting lost in the jargon, what this means is that the sector weightings are equal weight. But within each sector, we’re not talking about equal weighting them. So, the way Nvidia and Apple and Microsoft take massive parts of a cap-weighted index, they’re still the biggest parts of the technology sector. But the sector itself is equal weighted.
How has this done, from a performance standpoint historically in terms of equal weighting sectors? And is there a difference in terms of what you’d expect from performance when you’re doing this at the sector level than when you’re doing this at this stock level?
Todd Rosenbluth: The short answer is it’s performed relatively well. Now, I know folks often use Morningstar. It’s a three-star-rated fund. That isn’t that surprising to me, because the reference point of comparison is the S&P 500. So in the most recent time periods when we’ve been driven by a handful of mega-cap stocks, EQL has lagged behind that, but has outperformed an equally stock level approach to investing.
So, this to me is a nice middle ground. You’re taking on a little bit more risk at the stock level than you would from an equal-weighted perspective, but reducing that sector exposure. And yes, you’re correct. So, let me just be more specific. This owns XLK, for example, to get its technology exposure, the Technology Select SPDR ETF, XLK, is concentrated in Apple and Microsoft and Nvidia.
But at 9% overall, if you get roughly 20% in Nvidia, you can do the math here. it’s a good amount within your portfolio, but it isn’t the same 6%, 7% of the overall S&P 500 that you’d have in an individual stock.
Chuck Jaffe: In terms of how this fits in with a portfolio, this strikes me as a core position. I want to be in the market, and I want to be agnostic as to what’s going to lead the market. But I want to be able to get broad exposure. That said, if somebody has a core fund, why add this? Is there a reason you’d add this fund and this thinking to your portfolio if you don’t have it already?
Todd Rosenbluth: Most folks are getting exposure to the equity markets using the market-cap-weighted S&P 500, whether that’s from iShares, from State Street, from Vanguard … to name the three largest of those ETF providers. We think this ETF vehicle can complement that existing strategy. So you would reduce your sector dependence on technology, reduce your underexposure to some of the smaller sectors, like real estate and utilities and energy, and being able to diversify away from the cap-weighted approach.
Now the cap approach is diversified, but it’s concentrated in a handful of stocks. And last week we had Nvidia report results. That stock is up; has doubled this year. It’s up six or seven times since 2013. Many people are concerned with how large an exposure it has become within the broader market.
EQL can be a great way of adding something to your portfolio. Take a little bit off of your large-cap core tied to the S&P 500, and use this. And you can alleviate some of your concerns about the single-security and single-sector exposure that you’d have by investing in the S&P 500 on a cap-weighted basis.
Chuck Jaffe: Normally when you and I talk about something that’s focused on sectors, one of the questions that I ask is, what’s a portfolio position? How much of a portfolio would you want this to be? Because you’re digging into sectors and you’re tilting, but what you’re trying to do is apply a tilt. Well, this is not about tilting, I don’t think. I think this is about ballast, right?
This is about kind of underpinning your portfolio instead of leaning it into any one given area. Given that that’s the case, do you need to have a big slug of this for this to have the appropriate impact on a portfolio? In other words, if this isn’t going to be a core, is it going to actually have much impact other than it’s a good fund in my portfolio?
Todd Rosenbluth: So again, people should figure out the appropriate allocation that makes sense to them. But if you used 50/50, for example, 50% tied to the market-cap-weighted to the S&P 500, where I think technology is roughly 30% the last time that I looked, and use EQL, which has roughly 9% exposure. Let’s just make the math simple… for me, that has 10% exposure.
You have half of your exposure, half of your allocation toward 10% of technology. Half of your exposure toward the market cap weighted that has 30%, you would reduce your exposure to technology down to 20%. That can have a meaningful impact overall. So you’re moving away from the extremes: the extreme underweight or under exposures within a portfolio and the extreme over exposures in a portfolio combining this.
If you did 75/25 or 25/75, obviously the math changes quite a bit. But you can impact your portfolio quite notably using EQL as a complement to a market-cap-weighted approach.
Chuck Jaffe: It’s a really interesting fund. And again, maybe a little less about current events, but only a little than it is about portfolio construction. But a fun one, Todd. Thanks so much for joining me to talk about it.
Todd Rosenbluth: My pleasure, Chuck. See you next week.
Chuck Jaffe: It’s the ALPs Equal Sector Weight ETF, EQL. It’s the ETF of the Week from Todd Rosenbluth at VettaFi. The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe.
And yes, that’s me. And you can learn all about my hour-long weekday podcast by going to MoneyLifeShow.com, or by searching for my show wherever you find your favorite shows. By the way, if you’re searching for information on your favorite ETFs, or any ETFs that we talk about here or that you might add to your portfolio, make sure you check out VettaFi.com.
They’ve got all the tools there to help you out. And by the way, they’re on X or Twitter at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest, he’s there too. He’s at @ToddRosenbluth. The ETF of the Week is here for you every week. Subscribe on your favorite podcast app so you don’t miss an episode. We’ll be back with another new fund for you to consider next week.
And until then, happy investing, everybody!
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