RSPU: Great Utility Fund That Works (NYSEARCA: RSPU)

I often point to the utilities sector as a leading indicator of stock market volatility. Because it is the most bond-like sector of the stock market, it tends to perform well when there are concerns about an economic slowdown and more violence. Stock market ahead. But when I make these references to utilities, I do so on market-weighted versions of them.

As I have mentioned in my previous writings, I am a fan of equally weighted strategies in this part of the cycle. So why don’t we apply that to utilities? This is what Invesco S&P 500® Even Weight Tool Box (NYSEARCA:RSPU) Aims to. Launched in November 2006, the RSPU tracks the performance of the S&P 500® Equal Weight Utilities Plus Index. This index includes the utilities and communications services sectors of the S&P 500®, weighted equally across all companies. RSPU eliminates the size bias inherent in Market capitalization weighted indices favor a more democratic representation of the utility world.

Look at the holding

The fund currently has 32 holdings. Looking at holdings, no position is larger than 4%. The relative weights are due to poor/underperformance among the stocks in the fund.

I like the balance here as there are some ETFs (like XLU) that have companies like NextEra Energy (NEE) with a weight of 14.77%. The result is that performance patterns will look different given significantly changed weights.

As for industry allocations, equal weighting here results in electricity and multi-utilities making up more than 85% of the fund. This is exactly what you want to see for something so tied to the bond-like “need” sector of the stock market.

Peer comparison: RSPU vs. XLU

I mentioned the Utilities Select Sector SPDR® (XLU) Fund earlier because this is the fund I often look to for information on market movement and relative momentum potential. XLU tracks the Utilities Sector Index, which in turn tracks the Utilities Sector of the S&P 500 Index (SP500). XLU is the largest utility ETF by assets under management, with more than $13 billion. When we look at the RSPU to XLU price ratio, we find that RSPU has performed exceptionally well, suggesting that overall equal weighting has worked. The more recent movement has to do with the company-specific dynamics in XLU’s top 10, but regardless, I like what I see here.

Weigh the pros and cons

First the pros: The fund’s equal weight methodology means you’re unlikely to be overly exposed to any one company or even subsector – and so your portfolio is less risky. Second, utilities have a reputation for being a more defensive sector, which means they have the potential to be a good bet in times of potential market volatility and economic downturn.

The important thing for me is that the utilities sector has clearly shown great relative strength, and I think that will continue. I say this because things are slowing down economically, and the recent outperformance is consistent with the late cycle behavior of the broader markets. This, coupled with the possibility of the Fed cutting interest rates, making the dividend component of utilities’ total yield more attractive, should lead to a broader rotation into the sector.

the negative side? The utilities sector tends to be viewed as a slower-growing sector, and this can mean lower returns in bull markets (although you are less exposed to the downside). An equal-weighted structure also has the potential to achieve a higher turnover rate than a traditional fund, however comes additional transaction costs due to the rebalancing that is undertaken.

Conclusion – a wise choice of exposure to benefit

I love this box very much. I like the aids at this stage of the cycle, and I like the evenly weighted approach in general. The Invesco S&P 500® Equal Weight Utilities ETF can be considered a good addition to an investment portfolio for investors who want to reduce their exposure to market shocks. There’s nothing wrong with XLU either, I just think that having less company-specific exposure is important here. If markets become more volatile, I think you will see more and more interest in the sector broadly. Strong portfolio here.

Expect crashes, corrections and bear markets

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