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 Weight ETFs’.
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 markets.
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.
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.
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 (NYSEARCA:RSP)
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 each stock.
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. 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.
Guggenheim S&P 500 Equal Weight Industrials ETF (NYSEARCA:RGI)
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 uncertainties.
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 Earnings).
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%, respectively.