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Guggenheim Plans Another Equal-Weight ETF

Zacks Equity Research

Guggenheim, one of the country’s biggest ETF providers, was the first firm to offer strategic or smart beta ETFs with the launch of Guggenheim S&P 500 Equal Weight ETF (RSP) in 2003.  At the beginning of the year, Guggenheim had 15 equal weight ETFs with $12.6 billion in assets under management. Other equal weight ETFs by Guggenheim include Guggenheim S&P MidCap 400 Equal Weight ETF (EWMC) and Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSC) (read: Smart Beta ETFs That Stood Out Amid Market Volatility).

 

Continuing with this trend, the issuer has recently planned a new ETF targeting the U.S. large-cap space. Though some key information, including expense ratio, ticker and holdings, was not released, we have highlighted some of the main points of the proposed fund below.

 

Guggenheim S&P 100 Equal Weight ETF in Focus

 

As per the SEC filing, the proposed ETF seeks to track the performance of the S&P 100 Equal Weight Index before fees and expenses. The S&P 100 Equal Weight Index is an equal weighted version of the S&P 100 Index, a subset of 100 common stocks of the S&P 500 Index. The index has the same securities as the capitalization weighted S&P 100, but each company in the S&P 100 Equal Weight Index is allocated a fixed weight.

 

The S&P 100 Equal Weight Index measures the performance of the large-cap segment of the U.S. equity universe. The index uses an equal weighting strategy wherein each sector and the individual securities within each of the sectors are given equal weights. As such, concentration risk is expected to be pretty low in this fund.

 

Presently, the index holds a well-diversified basket of 102 stocks. From a sectorial perspective, Information Technology, Financials and Industrials with weight of 15.2%, 14.8% and 14.3%, respectively, hold the top three holdings in the index (as of February 29, 2016).

 

How Might it Fit in a Portfolio?

 

The fund could be a good choice for investors seeking a diversified exposure to the U.S. large cap stocks. Currently, the U.S. markets are experiencing extreme volatility. Global growth concerns, escalating geo-political tensions, a surge in the U.S. dollar and uncertainty over the timing of the next interest rate hike in the U.S. are some of the factors to be blamed for the volatility (read: How to Play the Choppy Market with Cheap Smart Beta ETFs).

 

Amid such volatile times, investors seek some smart stock-selection strategies to alleviate the risks in the market. Here is where equal weight ETFs comes into play. These funds do a great job in managing single-security risk, thanks to their equal allocation in all securities in the basket irrespective of market capitalization. As a result, it limits the risk of a severe downfall in any particular security, providing a nice balance in the portfolio. Additionally, with quarterly rebalancing, equal weighted funds tend to cash in on the overvalued segments and reinvest in the underperforming ones, potentially allowing for outperformance if the trend reverses. But while these have a minimal concentration risk, they charge a hefty expense ratio compared to their fundamentally/capitalization weighted counterparts.

 

ETF Competition

 

As far as competition within the space is concerned, the fund could come up against Guggenheim’s very own product RSP or funds from other providers like PowerShares Russell Top 200 Equal Weight ETF (EQWL) and PowerShares Russell 1000 Equal Wght ETF (EQAL).

 

RSP is one of the most popular funds in its space managing an asset base of $8.7 billion and trading in good volumes of more than 1.2 million shares a day on average. The fund tracks the S&P 500 Equal Weight Index, which measures the performance of the top 500 U.S. companies in equal weights.

 

Sector-wise, Consumer Cyclical, Industrials and Technology take the top three spots with more than 43% allocation. The fund charges 40 basis points and has returned 1.1% so far this year.

 

EQWL, on the other hand, is comparatively less popular with an asset base of $34.1 million and trades in low volumes of roughly 2,000 shares. The fund tracks the Russell Top 200 Equal Weight Index to provide exposure to the U.S. large-cap equity market. The fund has an expense ratio of 0.25% and has lost 1.2% in the year–to-date period (see all Large Cap ETFs here).

 

Though the U.S. large cap space is not much crowded, the new fund if launched is nonetheless expected to face stiff competition from RSP, EQWS and EQAL. However, the fund might manage to build decent assets in case it charges less in fees, or if it manages to return more than the above two funds, should it pass regulatory hurdles.

 

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GUGG-SP5 EQ ETF (RSP): ETF Research Reports
 
PWRSH-RT200 EWP (EQWL): ETF Research Reports
 
GUGG-SP400 EW (EWMC): ETF Research Reports
 
GUGG-SP600 EW (EWSC): ETF Research Reports
 
PWRSH-R1000 EW (EQAL): ETF Research Reports
 
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