An Equal-Weight ETF Approach to Diversify Current Market Risks

As U.S. markets continue to oscillate, investors can consider an equally weighted exchange traded fund strategy to help diversify risk from a top-heavy portfolio.

U.S. equities turned positive late Wednesday, paring early losses, as investors grew more optimistic that Democrats and Republicans could push past the political brinkmanship on Capitol Hill and come to a deal to average an unprecedented government debt default. Republican Senator Mitch McConnell stated that his party would support an extension of the federal debt ceiling into December, Reuters reports.

“McConnell made some dovish comments about temporarily extending the debt ceiling,” Jay Hatfield, founder and portfolio manager at Infrastructure Capital Advisors, told Reuters. “That’s going to be interpreted in the short-run as positive.”

The political relief helped alleviate early morning selling on Wednesday after a strong private jobs report for September helped fuel bets the Federal Reserve could more aggressively taper its monetary stimulus soon. The ADP National Employment Report revealed private payrolls rose by 568,000 jobs last month, compared to polled by expectations of an increase of 428,000 jobs.

“Positive labor market data comes with the implication that the Fed can tighten policy at a quicker pace. But the fact that hiring is up shouldn’t be discounted — it’s definitely a good thing in terms of recovery,” Mike Loewengart, managing director, investment strategy at E*TRADE Financial, told Reuters.

Meanwhile, investors looking to diversify their investment portfolio away from heavy mega-cap names can consider the Invesco S&P 500® Equal Weight ETF (RSP), which follows the S&P 500 Equal Weight Index (EWI). As its name implies, the benchmark equally weights the 506 members of the S&P 500. Looking at the ETF’s holdings, the portfolio includes 8.7% mega-aps, 33.7% large-caps, and 57.2% mid-caps.

In comparison, the more widely observed SPDR S&P 500 ETF Trust (SPY), which tracks the benchmark S&P 500, includes a top-heavy 50.6% mega-cap tilt, 33.8% large-caps, and 15.2% mid-caps.

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