Reports made much of a small number of stocks accounting for massive portions of broader market returns early this year. In other words, concentration risk is again on market participants’ radars. If concentration risk is an issue, it certainly pertains to sector ETFs. Take the case of the Technology Select Sector Index. Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) combine for about 46% of that index’s weight.
In the cap-weighted Communication Services Select Sector Index, Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOG) combine for roughly 46%. Investors can find more sector-level diversification with Invesco’s lineup of equal-weight sector ETFs.
As is the case with broad market equal-weight strategies such as the Invesco S&P 500® Equal Weight ETF (RSP), there are times when equal-weight sector ETFs will lag their cap-weighted counterparts. There are also times when the more diverse sector funds will top cap weighting. Those occasions are not linear across all 11 GICS sectors.
Some Equal-Weight Sector ETFs Standing Out
Over the past year, some equal-weight sector ETFs stood tall. For example, the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD) beat its cap-weighted rival by a handsome margin over the past 12 months, according to S&P Dow Jones Indices data.
The research firm also observed that during that period, the Invesco S&P 500 Equal Weight Industrials ETF (RSPN) and the Invesco S&P 500® Equal Weight Health Care ETF (RSPH) were superior bets relative to their cap-weighted competitors. The Invesco S&P 500 Equal Weight Real Estate ETF (RSPR) declined during that period. This is likely due to rising interest rates, but it performed less poorly than the equivalent cap-weighted real estate ETF.
Many saw the equal-weight financial services and technology ETFs as laggards during that span, but both cases are easily explained. The Invesco S&P 500 Equal Weight Technology ETF (RSPT) doesn’t feature the big weights like Apple and Microsoft that are found in a cap-weighted tech ETF. In terms of the Invesco S&P 500 Equal Weight Financials ETF (RSPF), that fund was hindered by exposure to smaller regional banks, which were slammed earlier this year amid multiple bank failures.
As for near-term catalysts that could propel some of the aforementioned equal-weight ETFs, S&P Dow Jones notes that the equal-weight consumer discretionary and industrial benchmarks tilt towards the size factor. A smaller stock resurgence could boost RSPD and RSPN. On the other hand, RSPH has a value tilt, indicating it could benefit from a rebound in value equities.
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