Looking for a strategy that can mitigate some of the big risks impacting the S&P 500? The equal weight ETF EQL may offer one intriguing tool to do so. With concentration risk and particularly risk to tech investing looming over the stock market, a strategy like the Alps Equal Sector Weight ETF (EQL ) offers diversification and the potential to perform relative to peer strategies.
Let’s start with concentration risk. Investors with 401(k)s, for example, may feel disturbed that more than 80% of the year’s gains stem from just 10 firms. Such top-heavy performance from the mega-cap space adds concerning vulnerability to the overall S&P 500 and many portfolios. Overweighting to those firms means bad news for, say, Apple (AAPL) or Nvidia (NVDA), and could significantly damage many portfolios.
Tech’s significant representation in those 10 firms deserves examination. Tech stocks may be overvalued, which may impact future earnings drops. Many companies may currently be benefiting from having locked-in debt deals and loans at great rates. Bank walks and the lagging impact of rate hikes on the credit market, however, may threaten tech stocks in the near-to-medium term.
Digging Into Equal Weight ETF EQL
These and other factors may add to the case for an equal weight ETF like EQL. The fund tracks the NYSE Select Sector Equal Weight Index, which assigns an equal weight to each sector and then equal weights stocks therein. EQL charges 26 basis points (bps) and has returned 12% YTD, outperforming both its ETF Database Category and FactSet Segment averages.
In doing so, the strategy also hit a key buy signal per its tech chart on YCharts. EQL’s price rose above its 50-day simple moving average (SMA) of $105.3 as of Friday, often considered a buy signal by market watchers. While it remains to be seen whether it will continue to rise in price, EQL presents an intriguing option for those looking to mitigate concentration risk or benefit from upswings in less popular sectors.
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