The Magnificent Seven and a handful of other large-cap growth stocks continue captivating investors’ attention. That potentially overshadows opportunities offered by more diverse strategies, including equal-weight ETFs.
Take the case of the ALPS Equal Sector Weight ETF (EQL). The fund returned 8.4% year-to-date as of August 15. That is admirable when considering EQL’s weight to tech stocks isn’t even a third of what’s found in the cap-weighted version of the S&P 500. That’s the result of EQL equally weighting the 11 global industry classification standard sectors using the popular Sector SPDR ETFs.
EQL’s ability to diversify matters at a time when a small number of stocks and one sector — technology — loom large. Not only that, but EQL lives up to reason why equal-weight was originally created.
“The strategy was created in response to concerns that market-cap-weighted indices can exhibit momentum bias – the concept of winners continuing to get a larger weight – especially when heading towards the end of a market cycle when valuations become frothy,” according to ETF Stream.
Other Tailwinds for Equal-Weight EQL
EQL’s status as an ETF not heavily dependent on growth and tech stocks is coming into focus for another reason. Data indicates active fund managers remain fond of the Magnificent names. Yet those money managers have recently been pulling capital from tech stock, according to Bank of America.
Importantly, that’s not an indictment of overall market conditions. That’s because those asset allocators are redirecting capital to other sectors, including financial services, energy, and utilities stocks. Professional investors’ renewed affinity for energy and utilities stocks is relevant in discussing EQL. That’s because the ALPS ETF devotes more than 17% of its roster to those sectors. The cap-weighted S&P 500’s combined weight to those groups is just 5.28%.
Adding to the near-term case for EQL are expectations that sectors outside of tech are ready to again grow in noteworthy fashion to S&P 500 earnings growth. Should that scenario materialize, it’d highlight EQL’s sector-level diversity.
“Earnings for non-tech look ready to grow. [Consumers are spending a bit more. That’s a positive for lenders, companies that sell building materials, and a whole ecosystem of industries. And] lower rates give the market a boost of confidence that growth can continue. Analysts covering consumer-discretionary companies, for example, expect sales, in aggregate, to grow almost 5% annually for the two years after 2025,” reported Jacob Sonenshine for Barron’s.
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