Equal-Weight & Market-Cap Sector ETFs

yogibearbull

Equal-Weight & Market-Cap Sector ETFs

As noted already, the GICS sectors (11) suffer from odd placements of companies because the companies can be only in one sector (e.g. all of the original FANG are now found in XLC and XLY), and also the super-concentration (e.g. XLE). The SPDR sector ETFs follow the GICS sectors using market-caps, but Invesco/IVZ sector ETFs use equal-weights. There are other related ETFs too, but this post lists only the SPDR (market-cap) and Invesco (equal-weight) sector ETFs. Search the other ETFs with etfdb.com/etfs/.

Sector, Equal-Weight ETF, Market-Cap ETF, Notes on SPDRs

Communications, EWCO, XLC, High % in META (#1), GOOG/GOOGL (#2, #3), NFLX (#6)

Consumer-Discretionary, RCD, XLY, High % in AMZN (#1), TSLA (#3)

Consumer-Staples, RHS, XLP

Energy, RYE, XLE, High % in XOM (#1), CVX (#2)

Financials, RYF, XLF, Real-estate equities are now in XLRE, mREITs remain

Healthcare, RYH, XLV

Industrials, RGI, XLI

IT, RYT, XLK

Materials, RTM, XLB

Real Estate, EWRE, XLRE

Utilities, RYU, XLU

SP500, RSP, SPY

StockCharts has CandleGlance charts for SPDR ETFs. https://stockcharts.com/freecharts/candleglance.html?[SECT]

Added is one for Invesco ETFs. https://stockcharts.com/freecharts/candleglance.html?RSP,RCD,RGI,RHS,RYE,RYF,RYH,RTM,RYT,RYU,EWCO,EWRE|B|null

https://ybbpersonalfinance.proboards.com/thread/133/gics-sectors-industries?page=1&scrollTo=899

DavidF

Michael Santoli, Senior Markets Commentator at CNBC, has been pointing out the relative outperformance lately of the equal-weight S&P 500.

https://stockcharts.com/freecharts/perf.php?spy,rsp

yogibearbull

Yep, several equal-weight ETFs are performing better than market-cap ETFs. This is an indication of the breadth in the market.

yogibearbull

Invesco/VZ has changed the tickers for its equal-weight sector ETFs and those are updated here, https://ybbpersonalfinance.proboards.com/post/1097/thread

dryflower

DavidF said:

Michael Santoli, Senior Markets Commentator at CNBC, has been pointing out the relative outperformance lately of the equal-weight S&P 500.

https://stockcharts.com/freecharts/perf.php?spy,rsp

The chart seems to show the opposite.

yogibearbull

@DavidF was right in January 2023 (we had a strong January Effect), @dryflower is right for June 2023. This market has been moving fast and rotating.

Sven

@DavidF, RSP is still trailing SPY in your chart.

Think over a longer term, 5 years and longer, RSP outperforms that of SPY.

BenWP

You’re absolutely right, @dryflower. I found David Snowball’s write up on equal-weight S&P (RSP, VADDX, and INDEX) in this month’s commentary to be very helpful. If one foresees a market not dominated by the mega-cap tech stocks, but one that continues to rise, then one of these index funds might be in the sweet spot. RSP YTD numbers don’t knock your socks off, but the fund might outperform the SPY over a longer period. FWIIW, I’m nibbling at RSP. INDEX has a lot to recommend, but it is TF at Schwab, so fees for incremental purchase would wipe out any performance advantage it offers. Same is true for VADDX.

dryflower

For those who like stupid mnemonics (the best kind), I think of the equal-weight etf to be a

Real Special Piece of my portfolio.

Level5

I’ve been trying to lean into investing in the equal weight proposition. I think the supposition is, if the top heavy-weighted stocks in the S&P 500 were to drop in value, then the other 490+ stocks would increase in value through the top-heavy stocks’ value drop, allowing for the remaining stocks to rise in relative value, yes? In 2022 RSP dropped less than SPY (PV backtest), okay.

Still, from the chart, it appears there’s a close correlation. So if the top-heavy stocks drop, so do the remaining 490+. For me it seems, this is a seductive rationale rather than an actionable strategy. What am I missing?

dryflower

From a common sense perspective, if one's goal is to be agnostic about the fortunes of any one company, why would you want to invest a lot more money in to some but not into others?

But also, it's axiomatic that you should let your winners run, and with an equal weight portfolio, you keep chopping them back.

Over any given time period, one approach will be better than the other. In a horse race, you only have to wait 2 minutes to see whether you were right. In this race, you will have to wait 10 or 15 years.

Academic papers, difficult to comprehend, have been written on this question, and I just do not know what the right answer is. (Of course, it's also true that the "right" academic answer may produce inferior returns.

I do think that the equal weight approach, because of greater diversification, is likely to do better in extreme bear markets.

Mark

I don't think that you get greater 'diversification' per se with the equal weight approach, only position size is more balanced.

dryflower

Well, okay, lets just say less concentration.

Level5

@dryflower - I did a quick look back comparing RSP and SPY using PV with starting ranges of 2007-2010, followed by extending the end date through to 2020. (Since I’m using a free version I’m unable to link the charts).
- From Oct 2007 through Mar 2009, SPY outpaces RSP.
- But by July 2009, RSP regains the lead over SPY and holds it until
- 2020 when SPY begins to dominate.

So from my simple look-back, it appears that your thinking about an extreme bear market benefiting the equal weight index “bears out.” At least using RSP and SPY.

yogibearbull

One could say that equal-weight is the oldest "factor" around. It removes the large-cap bias of market-cap based ETFs.

PV Runs are easy to link by using the "Link" click on the PV results title line. As these URLs are long, it is best to use them in MFO's Link-tool to post. Here it is since 10/2007, PV SPY RSP 10/2007-

Level5

Thanks @yogibearbull

BenWP

Very interesting points raised by several members. It is true that the equal weight fund does have to sell its winners down to the .2 allocation, but I understand that such rejiggering occurs only 4 times per year. Winners are pared back while stocks that have become cheaper (i.e., lost value) are on sale, so to speak. The gains from this « value proposition «  should compensate for the opportunity cost of selling gainers early.

I did not previously own an S&P 500 index fund in my actively managed portfolio, so I am not replacing or duplicating anything by dipping my toes into RSP. I do own plenty of TIEIX, the TIAA-CREF Equity Index Fund, in my retirement account. I often hear chirping in my mind from some irritating creature named FOMO. Maybe others have been visited by this PITA. On good days, I can show him/her the door.