Equal weighted funds provide enhanced diversification and often outperform market cap-weighted counterparts.
The S&P 500 EWI, which weights each individual security equally, outperformed the S&P 500 by 0.8% in May, a continuation of the 2% outperformance demonstrated in April.
Funds that weight each security equally are picking up steam. However, investors are missing out on another opportunity: funds that weigh equally by sector, such as the ALPS Equal Sector Weight ETF (EQL ).
EQL offers exposure to the domestic equity market but utilizes a unique methodology to access this asset class. Each sector of the economy receives equal weight in EQL, a strategy that results in a drastically different composition relative to market cap-weighted products such as the SPDR S&P 500 ETF Trust (SPY ).
EQL is designed to offer more balanced exposure than its market cap-weighted peers and has the added benefit of avoiding the potentially adverse impact of rallies or crashes in specific sectors of the economy, according to VettaFi.
The fund has outperformed the FactSet Segment Average amid the recent market turbulence. EQL has returned -3.65% over one month compared to its peers’ average of -4.58%. According to VettaFi, year-to-date, EQL has returned -6.89% compared to its peers’ average return of -8.48% during the same period.
EQL uses a fund of funds approach and tracks the NYSE Equal Sector Weight Index, an index comprising all active Select Sector SPDR ETFs in an equal-weighted portfolio.
These are the Communication Services Select Sector SPDR Fund (XLC ), Consumer Discretionary Select Sector SPDR Fund (XLY ), Consumer Staples Select Sector SPDR Fund (XLP ), Materials Select Sector SPDR Fund (XLB ), Energy Select Sector SPDR Fund (XLE ), Technology Select Sector SPDR Fund (XLK ), Utilities Select Sector SPDR Fund (XLU ), Financial Select Sector SPDR Fund (XLF ), Industrial Select Sector SPDR Fund (XLI ), Health Care Select Sector SPDR Fund (XLV), and Real Estate Select Sector SPDR Fund (XLRE ).
EQL has a net expense ratio of 28 basis points.
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