An investor portfolio can’t thrive if it’s too top heavy in say one or even a few stocks. The same can be said for exchange traded funds (ETFs), which is where an equal-weight strategy can help with diversification and also risk mitigation.
An equal-weight strategy is just that: constructing a portfolio that has an equal allocation over a range of holdings. For a simplistic example, imagine an ETF with four stocks — each one gets a 25% allocation to comprise the fund.
Popular ETFs which use an equal-weight strategy often include slicing and dicing the S&P 500. In these funds, constituents in the S&P 500 index get equal exposure — a strategy inherent in funds like the (RSP ).
As mentioned, one of the benefits of an equal-weight strategy is that the fund won’t be too heavily concentrated in one or a few stocks. As such, investors get equal exposure to stocks irrespective of size, so large caps get the same allocation as small caps in order to achieve a higher level of diversification.
Exposure to small caps especially can allow for better performance, albeit with more risk as when markets trend higher, small caps can make amplified moves to the upside. Of course, in a market trending down, large caps can offer safety due to their relatively lower volatility.
Get Tailored Exposure
An equal-weight strategy doesn’t have to confine itself to a broad market index like the S&P 500. It can also be applied to specific sectors, allowing ETF providers to offer products that cater to exposure in a sectors-specific area like healthcare or technology.
Invesco, for example, has range of ETF products that cater to the equal-weight strategy. As mentioned, there are sector-specific ETFs that utilize the strategy in order to get customized exposure like the (RYH ) or the (EWRE ).
Adding an equal-weight strategy can help diversify a portfolio, especially when market conditions warrant stronger performance for an equal-weight strategy versus a market cap-based strategy. It’s just one of the many tools investors can add to their proverbial toolbox when building a portfolio that can weather all market conditions.
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