An equal weight exchange traded fund strategy could help offset risk as a sell-off drags on large-cap U.S. stocks.
U.S. equities slipped on Tuesday as rising inflationary pressures weighed on the earnings season outlook.
“Investors are running around like chickens with their heads cut off,” John Buckingham, portfolio manager at Kovitz, told the Wall Street Journal. “They focus on one thing at a time and buy and then change their mind and sell.”
Rising crude oil prices and ongoing supply chain disruptions have weighed on businesses and consumers in the run-up to quarterly reports.
“Given all of the difficulties that companies are having to deal with, there is more of a chance for more negative surprises this quarter than there were in the previous quarters,” Tom Martin, senior portfolio manager at Globalt Investments, told Reuters.
“We have had a good run here (year-to-date) so you can get continued back and forth across the markets, a lot of it is going to be this push and pull between inflation expectations, and potentially the dampening of growth,” Martin added.
According to IBES data from Refinitiv, analysts projected a 29.6% year-over-year increase in profit for S&P 500 companies over the third quarter.
The markets are also weighing on disappointing economic data that are beginning to come out, which have added to fears of a slowing economic expansion.
“There is a tone of worry on the data front, and that’s been the factor that hasn’t really turned around yet. We haven’t seen any strong reports that suggest that this is just a temporary Delta variant driven slowdown,” Anwiti Bahuguna, senior portfolio manager and head of multiasset strategy at Columbia Threadneedle Investments, told the WSJ.
Investors who are worried about a pullback among the largest names that have led the rally could consider an equal weight ETF approach to better diversify beyond the large-cap names. For example, the Invesco S&P 500® Equal Weight ETF (RSP ) follows the S&P 500 Equal Weight Index (EWI). As its name implies, the benchmark equally weights the members of the S&P 500.
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