Want an Equal-Weight ETF? Don’t Ignore This Important Wrinkle

Is it time to zig as markets potentially zag in a negative direction? The economy continues to chug along at a somewhat disappointing clip. And while stocks are up, trepidation looms for investors and market watchers. A nervous Fed is trying, meanwhile, to thread the rate-cut needle between mediocre jobs numbers and stubborn inflation. With those factors in mind, investors may want equities options like an equal-weight ETF.

Equal-Weight ETFs & Diversification

They may want to take note of an important wrinkle. Just equally weighting the S&P 500 stocks doesn’t really produce the results investors want from equal-weighting approaches. According to SS&C ALPS Advisors Head of Fund Sales and Strategy Paul Baiocchi, speaking to ETF Prime host Nate Geraci on a recent episode, that approach may miss the mark. 

“A lot of people’s default choice to get away from the cap-weighted view of the S&P 500 is to equal-weight the stocks in the S&P 500,” he explained. “Our argument is that if you’re trying to capture some additional breadth from the market — the other 493 if you will, in the S&P 500 — doing so just by equally weighting those stocks in the market isn’t the most effective way to do that.”

Instead, investors could look to an equal-weight ETF like EQL. The ALPS Equal Sector Weight ETF (EQL) charges a 25 basis point fee for its approach. The fund equal-weights sectors rather than just individual stocks to craft a more honed allocation.

“By equal-weighting sectors which EQL does, you’re keeping the integrity of a given sector. Take for example, energy. You’re ensuring you still have the most weight in energy to the largest companies,” he added. “Importantly, you’re giving the same weight to sectors like staples and utilities as you are to technology.”

EQL has taken that approach and run with it. It has returned 13.5% over the last five years, steady performance beating its ETF Category and FactSet Segment averages. Looking ahead, it could be poised to perform well if tech cycles out of favor and other sectors rise. It may be one to watch for those looking to equally weight a top-heavy S&P 500.