The equal-weight methodology is one of the oldest iterations of alternative indexing and can even be considered a forefather of smart beta. Some equal-weight broad market funds have lengthy track records of outperforming cap-weighted rivals, but there are some gems among equal-weight sector funds.
Specifically, the the Guggenheim S&P 500 Equal Weight ETF (NYSEArca:RSP), which tracks the S&P 500 Equal Weight Index, just recently celebrated its 14th anniversary after launching on April 24, 2003, and over the past 14 year period, RSP has outperformed the benchmark S&P 500. Stars among equal-weight sector ETFs include the Guggenheim S&P Equal Weight Healthcare ETF (NYSEArca:RYH).
Equal-weight can lead to important sector and industry differences relative to cap-weighted funds, as is seen with both RSP and RYH.
Sector weights are also driven by the number of companies in each sector rather than their market value, so RSP favors consumer discretionary, real estate and utilities sectors, but the equal-weight ETF underweights areas like tech, healthcare and financials when compared to the market cap-weighted S&P 500.
In RYH, that equal-weight ETF leans away from pharmaceuticals and biotechnology stocks, which are usually the largest industry weights in cap-weighted healthcare funds.
“As is to be expected, RYH does things differently than its cap-weighted peers. For example, the Guggenheim ETF allocates less than 32% of its combined weight to the pharmaceuticals and biotechnology groups, about half the weight assigned to those industries by traditional healthcare ETFs. Healthcare providers and device makers, however, combine for about 57%,” according to InvestorPlace.
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
“Equal-weight strategies are often criticized because their success is usually attributable to larger exposure to small caps. Still, it is hard to argue with RYH’s track record, which includes topping the Health Care Select Sector SPDR (NYSEArca:XLV) by almost 700 basis points over the past three years while displaying comparable volatility,” according to InvestorPlace.
Related: 3 Strategic Reasons Advisors Should Adopt Factor-Based ETFs
RYH, which is nearly 11 years old, has almost $710 million in assets under management and holds 61 stocks.
For more on smart beta ETFs, visit our Smart Beta Channel.
Tom Lydon’s clients own shares of RSP.