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Consider An Equal-Weight Approach To This Hot Sector's ETFs

ETF Professor

As many investors by now know, “hot sector” in this instance refers to consumer staples. That is right. A sector with a reputation for being boring, the group that is the fifth-largest sector weight in the s&P 500, is setting the market on fire on this year.

Well, the 1.2 percent year-to-date gain for the Consumer Staples Select Sector SPDR (NYSE: XLP) is “on fire” relative to the standards currently being set by this market. Just off the pace is XLP's equal-weight equivalent the Guggenheim S&P Equal Weight Consumer Staples ETF (NYSE: RHS), which is up 1.1 percent this year.

Equal weighting is widely considered one of the forefathers of the strategic or smart beta ETF movement and one reason that the methodology is believed to be effective is that it assigns comparable weights to small-caps as it does to large- and mega-caps. In other words, critics assert equal weighting works because of the small stock factor. 

However, the small stock factor is not relevant in evaluating RHS, at least not at the moment, because there is a small-cap staples ETF and it is down 2.6 percent this year. Obviously, it is not smaller stocks that are boosting RHS. Nor are the growth and momentum factors because staples ETFs that apply those methodologies are also well off the pace being set by RHS this year.

The ability of RHS to go toe-to-toe with its cap-weighted rivals is not a new phenomenon. In fact, the ETF is up more than 63 percent over the past three years. No cap-weighted staples ETF is anywhere close to that ballpark.

RHS holds many of the same stocks as are found in XLP, such as Dow components Procter & Gamble Co. (NYSE: PG) and Coca-Cola Co. (NYSE: KO). However, because RHS is not dominated by those stocks and comparable fare, the ETF can endure some of the stock-specific issues faced by the likes of Coca-Cola, P&G and Wal-Mart Stores Inc. (NYSE: WMT).

“Consumer staples stocks, which generally sport above-average dividend yields and have consistent earnings records, have been a bright spot in the U.S. equity market the last two years. After rising 6.6 percent in 2015, the total return for the S&P 500 consumer staples sector was just -0.8 percent year to date through February 12 in contrast to the 8.5 percent decline for the broader index,” said S&P Capital IQ in a new research note.

The research firm has buy or strong buy ratings on 26 of the 60 U.S. staples names it covers.

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