With Market Volatility Ahead, Use an Equal-Weight Strategy | ETF Trends

An uptick in COVID cases, inflation, and earnings reports can make for a volatile week on Wall Street, but an equal-weight strategy can help ease the market tension.

It could all be part of a natural pull-back after the major indexes hit record highs recently despite market headwinds like inflation. Not too long ago, investors were at ease with COVID cases falling and equities soaring.

“Fast-forward just a few weeks and things look a lot different. Concern over the Delta variant, soaring inflation and major swings in the market are creating a perfect storm for Americans,” writes 

An Allianz Life Q3 Quarterly Market Perceptions Study noted that market worries like inflation are causing some investors to stay completely out of the markets.

“The study found that more than two-thirds (67%) say they are keeping some money out of the market to protect it from losses. While it might feel a little counterintuitive, it’s important to remember that money left out of the market – even in times of volatility – isn’t working hard for you,” LaVigne adds.

Reduce Concentration Risk

One way to address volatility is to reduce concentration risk by not proverbially putting all eggs in one basket, or, in the capital markets case, one or a few stocks. There is one ETF, however, to consider that helps reduce concentration risk while gaining upside: the Invesco S&P 500® Equal Weight ETF (RSP).

An equal-weight strategy can prevent investors from being too over-concentrated in one or a handful of stocks. To ease the pain of future downtrends while still capturing upside, RSP fits the bill.

Per its fund description, RSP seeks to track the investment results (before fees and expenses) of the S&P 500® Equal Weight Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.

RSP’s balanced approach to its portfolio might dissuade short-term traders looking for quick gains during market movements. However, for the patient investor looking for long-term results, the fund is more ideal for this buy-and-hold strategy.

“This ETF is linked to the S&P 500 Index, however its unique weighting methodology will make it useful for some, while impractical for active traders,” an ETF Database analysis suggests. “Like many Rydex products, RSP is linked to an equal-weighted index, meaning that component companies receive approximately equal allocations. That results in exposure that is considerably more balanced than other alternatives such as SPY, and a methodology that some investors believe will add value over the long haul.”

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