Consider Equal Weight As Investors Move Into Defensive Sectors |

Flows into the utilities, healthcare, and consumer staples sectors surged last week as investors moved into defensive sectors.

Last week, the Federal Reserve raised the Federal Funds rate by 75 basis points for the fourth consecutive time in an effort to lower inflation. The target rate is now between 3.75% and 4%, the highest since 2008. 

Notably, the FOMC suggested it intends to continue to raise rates. It said last week that ongoing increases in the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

As the probability of a global recession continues to increase alongside economic uncertainty, investors are moving into sectors poised to outperform: utilities, healthcare, and consumer staples.

Historically, consumer staples, utilities, and healthcare outperform during recessionary periods, while communication services, real estate, and technology are the worst-performing sectors. 

During periods of economic recovery and expansion, consumer staples, healthcare, and utilities are the worst-performing sectors.

As investors rotate into defensive sectors, an equal-weight approach is worth considering to enhance diversification and reduce concentration risk, which is particularly important when overweighting specific sectors.

While not as top-heavy as other sectors, the utilities sector is still largely concentrated in its top five names. NextEra Energy Inc. (NEE), Duke Energy Corporation (DUK), Southern Company (SO), Dominion Energy Inc. (D), and Sempra Energy (SRE) make up over 41% of a market cap-weighted utilities sector ETF as of November 4. 

In contrast, the Invesco S&P 500 Equal Weight Utilities ETF (RYU) gives each security an equal weight at each quarterly rebalance, meaning five securities will make up roughly 15.6% of the fund after each rebalance. Investors look to equal-weight strategies to reduce concentration risk in a portfolio and increase diversification.

In the consumer staples sector, approximately 45% of the cap-weight index is tied to just four stocks: Procter & Gamble Company (PG), PepsiCo Inc (PEP), Coca-Cola Company (KO), and Costco Wholesale Corporation (COST). 

The Invesco S&P 500® Equal Weight Consumer Staples ETF (RHS) is an alternative for investors who want more equal exposure, comprising 34 securities that are equal weighted at each quarterly rebalance.

In a cap-weighted ETF offering exposure to the healthcare sector, the top 10 holdings make up 55% of the fund, as of November 9. 

The Invesco S&P 500® Equal Weight Health Care ETF (RYH) is designed to offer more balanced exposure for the long-term investor. The fund has exhibited a tilt toward low-volatility stocks, or companies whose shares have a history of lower standard deviation of returns. Such exposure tends to pay off most during periods of market stress, according to VettaFi.

For more news, information, and strategy, visit the Portfolio Strategies Channel.