The U.S. market was off to a great start this year and
continued to climb on an improving economy, solid retail and jobs
data and growing investor confidence. Some concerns about the Fed
stimulus led to a brief pause in the rally in the past two
months, but it appears that the longer-term bullish trend for
stocks is still intact.
In such a backdrop, a broad play on the equity markets can
give investors exposure to this trend. While cap-weighted
counterparts are certainly good options, a more targeted play
could be warranted by looking at the often overlooked 'Equal
Equal Weight ETFs not only go a long way in reducing overall
risk, but also provide significant upside potential, mainly
thanks to their equal allocation towards the entire spectrum of
securities in similar amounts. While these funds minimize
concentration risk, these charge a hefty expense ratio compared
to the fundamentally/capitalization weighted counterpart (read:
Are Equal Weight ETFs Worth The Cost?
The best thing about this approach is that performance is not
heavily dependent on the returns of a particular stock or group
of securities. Furthermore, with quarterly rebalancing,
equally-weighted funds tend to cash in on the overvalued segments
and reinvest in the underperforming ones, potentially locking in
gains from outperforming stocks.
However, investors should note that there are some downsides
to the structure. If trends in sectors continue over multiple
quarters, the equal-weight funds could be laggards, while a
similar situation could arise in declining and risk-off
Yet for investors looking for a new way to play in the current
market, a look at the top ranked equal weight ETFs could be a
good idea (see more in the
Top Ranked Equal Weight ETF in Focus
We have found a number of ETFs that have Zacks ETF Ranks of 1
or 2 in the equal weight space and are thus expected to
outperform in the months to come (read: all the
Below, we present three funds that we believe to be the best
choices to tap into the space. This trio has enjoyed strong
momentum over the past one-year time frame, and has potentially
superior weighting methodologies which could allow it to continue
leading in the months ahead.
Guggenheim S&P 500 Equal Weight ETF (
Investors looking for equal allocations in the stocks of the
S&P 500 index could find RSP an exciting pick. The fund
tracks the S&P Equal Weight Index, putting roughly 0.2% in
From a sectors look, the product is widely spread across
consumer discretionary and financials which make up for 16.5%
share each while information technology, industrials and
healthcare also receive double-digit allocations.
The ETF charges 40 basis points in fees per year from
investors, and has managed $4.6 billion in total assets. This
suggests that it is a relatively popular fund and that bid/ask
spreads should be extremely tight overall.
RSP has fetched 22.29% in terms of returns on a year-to-date
basis, which is higher than SPY by roughly 270 basis points over
the same period (read:
6 ETFs Beating the Market Over the Past Year
). Fortunately, long-term trends also favor the ETF, as it has
crushed SPY in the trailing five-year period, adding about 69.71%
compared to a 49.10% for the market cap weighted version.
The ETF currently has a Zacks ETF Rank of 1 or 'Strong Buy'
with 'High' risk outlook, suggesting that it is positioned to
outperform similar competitors in the future as well (read:
Zacks ETF Rank Guide
Guggenheim S&P 500 Equal Weight Industrials ETF
This ETF provides a targeted bet on one of the most cyclical
sectors in the U.S. market that has recently attracted investors'
attention and confidence amidst current global economic
The industrial sector is expected to be malaise prime winner
in the current market environment, and could lead stocks higher
in an upswing. The sector is seeing strength from improving
domestic demand for industrial equipment, expanding manufacturing
activity, rising exports and growing orders (read:
3 Industrial ETFs to Buy After Solid GE
RGI follows the S&P 500 Equal Weight Index Industrials,
holding 62 stocks in the basket that are weighed equally at just
under 1.7% each. From an industrial look, the fund is tilted
towards machinery that make up for one-fourth share in the basket
while aerospace & defense and commercial service &
suppliers round off to the next two spots at 18.11% and 14.45%,
The product has accumulated $49.4 million in its asset base
while volume is very light indicating a wide bid/ask spread,
while the fund charges 50 bps in fees and expenses. In terms of
performance, the ETF has delivered solid returns of 20% so far
this year, slightly lower than the ultra-popular,
Industrial Select Sector SPDR (
but above the SPY.
However, over the trailing five-year period, RGI returned more
than 51% compared to 46% gains for XLI. The fund currently has a
Zacks ETF Rank of 2 or 'Buy' with a 'Low' risk outlook.
Guggenheim S&P Equal Weight Consumer Discretionary
This underappreciated ETF offers exposure across the consumer
discretionary market with an equal weight methodology. Consumer
discretionary sector has proven itself a market leader over the
past few months as the labor market showed clear signs of
Further, a rising housing market and surging stocks added
to the "wealth effect" that resulted in increased consumer
confidence. This solid trend is expected to continue in the
second half of the year as well, encouraging many investors to
remain invested in this sector (read:
3 Top Ranked Consumer ETFs to Buy Now
Holding 83 securities in its basket, RCD tracks the S&P
500 Equal Weight Index Consumer Discretionary index with none of
the security holding more than 1.4% of the total assets. In terms
of industries, specialty retail takes the top spot at roughly
one-fifth of the total, followed by modest allocations to media
and hotel restaurants.
The fund has amassed $75.4 million in AUM. Expenses are a bit
steep at 50 basis points a year, while volume is a little light,
though the liquid nature of the underlying holdings should keep
bid/ask spreads tight.
The ETF currently has a Zacks ETF Rank of 2 or 'Buy' with
'High' risk outlook (read:
Time to Buy This High Ranked Consumer ETF?
). The fund has gained nearly 28% year-to-date and 133.5% in the
trailing five-year period, easily outpacing the broad sector
Consumer Discretionary Select Sector SPDR Fund (
and SPY by wide margins.
Investors have probably overlooked these equal weighted ETFs
to play the surging S&P 500 space (read:
Beat the Market with 'Pure' ETF Strategies
). The funds are bit costly when compared to other choices in the
space, while volume isn't great. But neither should be a big
problem considering their solid track records over long time
So, investors looking for large cap exposure should consider
these products in their portfolio to avoid company specific risk
and enjoy diversification benefits. These ETFs are the top rated
ones that have beaten similar products this year and could lead
to close out 2013 as well.
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GUGG-SP5 EW C D (RCD): ETF Research Reports
GUGG-SP5 EW IND (RGI): ETF Research Reports
GUGG-SP5 EQ ETF (RSP): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-INDU SELS (XLI): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
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