This is perhaps a riddle wrapped in an enigma: With large-cap stocks, such as Apple Inc. (NASDAQ: AAPL) and Google parent Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) leading the technology sector higher, how does an exchange-traded fund with little exposure to large-cap tech titans deliver decent returns?
Explaining The Complex Matter
The Guggenheim S&P 500 Equal Weight Technology ETF (NYSE: RYT) proves it is possible for a tech ETF to perform nicely even without big exposure to the largest, sexiest members of the S&P 500's largest sector weight. RYT is up 17.7 percent year to date, a performance that puts it ahead of some rival cap-weighted technology ETF. Plus, RYT was one of just over 160 ETFs to hit a record high on Thursday.
RYT follows the S&P 500 Equal Weight Information Technology Index, which is an equal-weight alternative to the cap-weighted Technology Select Sector Index. Clearly, there are significant differences between these two strategies. For example, RYT holds 69 stocks while the Technology Select Sector Index holds 73 stocks with a weighted average market value of over $339 billion.
Stepping Back To Look At Tech
The Technology Select Sector Index allocates over 56 percent of its combined weight to internet software, software and technology hardware stocks. Conversely, providers of technology services, semiconductor makers and software companies combine for over two-thirds of RYT's weight. At a time of strength for semiconductor stocks, RYT's 22.7 percent weight to that group is an advantage over the 14.4 percent allocated to that segment by the Technology Select Sector Index.
A traditional perk of equal-weight sector ETFs is the reduction of single stock risk. That is a consideration with cap-weighted tech ETFs due to the fact that these funds often feature significant weights to Apple, confirming that so goes Apple, so go cap-weighted tech strategies.
At the end of the first quarter, RYT's top five holdings represented just 7.6 percent of the ETF's weight while the top five holdings in the Technology Select Sector Index combined for over half that benchmark's weight, according to Guggenheim data.
Over the past three years, RYT has topped the Technology Select Sector Index by 530 basis points while being 110 basis points more volatile than the cap-weighted benchmark over that period.
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