Concentration risk is the name of the game right now for those looking at the S&P 500. The culprits include the mega-cap tech firms like (AMZN), (NVDA), and (MSFT). In total, five firms have helped push concentration risk in the S&P 500 higher than it peaked in 2000. While investors and market watchers understood the tech was top-heavy entering 2023, their persistence has stood out. That may invite some investors to look at ETF allocations to balance out that risk.
Concentration risk entails focusing too much on a given security or sector in an overall portfolio. For the U.S. economy, tech has stood out as a key driver of that risk despite rising rates and earnings concerns. Investors have added fixed income allocations with the return of “income” to diversify, but they may want an equities allocation, too. One strategy that could fit a concentration risk allocation may be (EQL ), the .
EQL recently hit $300 million in ETF AUM, a milestone that speaks to how investors are seeing its role. The strategy weights each economic sector equally which creates a very different set of exposures than found in a strategy like the (SPY ). EQL may not pick up on rallies due to its balanced approach, but it does mitigate crashes by the same token.
How EQL Handles Concentration Risk
Interestingly, EQL uses other SPDR ETFs to craft its equal sector weights. No single ETF therein holds a larger weight than 9.5%, with all eleven strategies weighted around 9%. EQL’s holdings range from industrial and materials ETFs in the SPDR suite to health care and consumer discretionary.
Taken together, that has helped the ETF return 12.2% YTD for a 26 basis point charge. The strategy is also sending a powerful buy signal, with its 50-day Simple Moving Average (SMA) well above its 200-day SMA. Its price overall sat above both as of August 3rd, per YCharts.
The S&P 500 has proven to be very durable so far this year, but challenges still loom. Multiple market-watching firms still expect a mild recession, while the lagging impact of the fastest rate hikes in decades has yet to be fully felt by firms across tech and other sectors. EQL provides broad equities exposure while mitigating concentration risk, and could make for a worthy addition to an equities allocation in the second half of the year.
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