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Cap-Weighted ETFs are Trumping Equal-Weight Rivals This Year


Long heralded as advantageous due to their ability to mitigate single-stock risk, equal-weight exchange traded funds are trailing their cap-weighted rivals this year.

In the essence of fairness, not all equal-weight ETFs are lagging their cap-weighted equivalents, but in terms of broad market funds, cap-weighted fare is standing out. Though its 1.7% year-to-date gain is far impressive, the S&P 500 is still well ahead of the Guggenheim S&P 500 Equal Weight ETF (RSP) , the equal-weight answer to traditional S&P 500 ETFs.

Likewise, the PowerShares QQQ (QQQ) is up 8.3% while the First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW) is up just half that.

As Bloomberg reports, mega-cap companies such as Amazon (AMZN), Facebook (FB) and Google (GOOG) are surging this year. That is good news for the cap-weighted ETFs with big weights to those stocks. However, equal-weight ETFs, even sector funds, usually do not feature weights of more than 2% or 3% to individual stocks, which mutes the impact one big name can have on the fund.

Still, it can be argued 2015 is an anomaly when it comes to equal-weight ETF performance. As July 16, RSP has delivered average annualized returns of 26.1%, according to Mornigstar data. A $10,000 investment in RSP on March 10, 2009 would be worth over $43,000 today. RSP, the best ETF in the Morningstar large blend category over the aforementioned period, has generated an average annualized return of 9.4% over the past 10-years, whereas the market-cap-weighted S&P 500 Index has returned an average 8%. [Celebrating the Bull Market With ETFs]

While equal-weight ETFs have been more than legitimized over the years, some critics allege that the advantages of these products are solely tied to deeper exposure to small-caps and/or value stocks. However, three is an on an oft-overlooked driver of returns to equal-weight ETFs: Rebalancing. Efficient rebalancing of equal-weight ETFs, either sector or broad market funds, not only drives returns, but also helps these ETFs steer clear of concentration risk. [How to Evaluate ETFs]

Even with cap-weighted ETFs, the broad market ones, topping equal-weight ETFs this year, there are some equal-weight sector funds easily trumping their market-cap-weighted rivals. For example, the Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) and the Guggenheim S&P Equal Weight Healthcare ETF (RYH) are easily topping the equivalent market cap-weighted equivalents this year.

However, cap-weighted consumer discretionary ETFs have been better thanks to large allocations to Amazon and Walt Disney (DIS), among others.

Tom Lydon’s clients own shares of QQQ and RSP.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.