Market volatility has returned to the major stock market indexes, and one way to help dampen the shock is via an equal weight strategy with ETFs like the Invesco S&P 500 Equal Weight Energy ETF (RYE).
An equal weight strategy can help minimize concentration risk so investors are not too heavy with one stock. The energy sector in particular can experience strong momentous moves, but right now, things are headed in the right direction.
Energy equities have been one of the best-performing sectors amid a volatile September. Moreover, market analysts suspect that they have more room to run to the upside.
“Energy stocks have strengthened over the past month, but they curiously still trail the remarkable increase in oil prices,” a MarketWatch report said. “Even with crude oil prices up 61% this year, analysts at J.P. Morgan think the U.S. economy can “support” another 66% increase without a significant detriment to consumers’ financial health.”
RYE seeks to track the investment results (before fees and expenses) of the S&P 500® Equal Weight Energy Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
The underlying index is composed of all of the components of the S&P 500® Energy Index, an index that contains the common stocks of all companies included in the S&P 500® Index that are classified as members of the energy sector, as defined by the Global Industry Classification Standard (GICS).
“This ETF offers a unique way to access the U.S. energy market, giving investors seeking to avoid cap-weighted products as an alternative way to bet on oil stocks,” an ETF Database analysis said. “RYE is likely too targeted for those investors with a long term focus, but can be useful as a way to tilt portfolio exposure towards a specific sector or as part of a long/short pairs trade.”
“Like many Rydex ETFs, RYE is equal-weighted, meaning that exposure is spread evenly across portfolio components,” the analysis added. “This methodology may be particularly appealing in the top-heavy energy industry, where traditional cap-weighting can result in significant concentration issues.”
Outpacing the S&P 500
Compared to the broader market index, the S&P 500, the strength in the energy sector is readily apparent. RYE itself is up close to 60% while the S&P 500 lags behind with a 17% gain year-to-date.
Rising oil prices could continue to buoy strength in the energy sector through 2021 and beyond. This also makes RYE a hedging opportunity for inflation as oil prices continue to rise and consumers feel the pain at the gas pump.
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