As markets flux, different sectors will tend to outperform others thereby requiring money managers to increase exposure to certain sectors or specific equities and then limiting exposure to others via active management. When it comes to passive management, exposure via market capitalization size could expose investors to certain concentration risks, but there’s an alternative—an equal cap weighting strategy via funds like the Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW).
GSEW seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Solactive US Large Cap Equal Weight Index (GTR). The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index.
The index consists of equity securities of large capitalization U.S. issuers. The index is an equal-weight version of the Solactive US Large Cap Index, a market capitalization-weighted index that includes equity securities of approximately 500 of the largest U.S. companies.
GSEW offers investors:
- Market cap bias avoidance: By tracking an index that equally weights the largest U.S. equities and rebalancing monthly, GSEW seeks to avoid concentration in the largest names. This approach may allow the fund to participate in a broad range of market cycles and potentially reduce exposure to isolated market incidents.
- Systematic rebalancing strategy: To maintain a target equal weight across approximately 500 of the largest U.S. equities, GSEW seeks to track an index that employs a disciplined and systematic monthly rebalancing process. Monthly index rebalancing enables the fund to adjust to market movements and better maintain its equal weighting.
- Cost-effectiveness: Priced to investors at 9 basis points, GSEW is among the most competitively priced Exchange-Traded Funds (ETFs) on the market. By comparison, the industry average for smart beta ETFs is 34 basis points (bps).
While market cap-weighted strategies certainly have their merits, particularly when heavy concentrations in the largest companies are outperforming the broad market, there are certain drawbacks. It can reduce exposure to smaller companies that are also outperforming but don’t get the necessary exposure.
During a market downturn, heavy exposure to these large companies can increase volatility or expose the investor to greater losses. In an equal weighted strategy, risk is minimized due to smaller exposure and thus, mute the effects of a downturn.
In the case of GSEW, it has exposure to large cap household names like Tesla and Amazon but also has exposure to lesser known companies like Teledoc Health or Coupa Software.
Here are its top 10 holdings as of July 9:
- Tesla Inc: 0.3%
- Roku Inc: 0.3%
- DocuSign Inc: 0.2%
- Square Inc: 0.2%
- Twitter Inc: 0.2%
- Teladoc Health Inc: 0.2%
- com Inc: 0.2%
- Trade Desk Inc : 0.2%
- eBay Inc: 0.2%
- Coupa Software Inc: 0.2%
For more fund information, click here.
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