EQL ETF: An Easy Do-It-Yourself Kind (NYSEARCA:EQL)

I have been very public about my concerns about market cap weighted averages, given how dangerous the concentration of market cap weighted averages currently exists. I’ve also been very vocal about my concerns about the tech sector’s dominance in “diversified” portfolios. Fortunately, there is Products available which can provide a different weighting system for the markets, e.g ALPS Equal Sector Weight ETF (NYSEARCA:EQL). This is an ETF that, at first glance, eschews conventional wisdom and offers long-term investors a new way to approach diversification. EQL is an ETF that essentially equals the weights of the 11 sector-specific SPDR ETFs, providing broad diversification that reduces the risk of sector concentration risk, and rebalancing quarterly along the way.

Very simple, right?

Look at the holding

When we look at the positions in the fund, we see that EQL is literally equal Sector-Weighting ETFs.

Note that because the fund rebalances quarterly to target equal weights, anything at the top of the list has naturally outperformed (utilities have been a clear leader recently) while anything toward the bottom has underperformed relative to other sectors. Nothing complicated here. I think this is actually a very simple way to get a quick snapshot of what’s going well in a given quarter, regardless of the EQL consideration of the investment.

The real question here? Why don’t you do this yourself? Net expense ratio is 0.25%. But you can certainly rebuild the exact same portfolio, and since you know the rules about when rebalancing occurs, save yourself some rollover costs. Note that this only applies to tax-deferred accounts. If you like this sector-weighting approach to taxable accounts, the EQL, given the ETF structure, will likely be more tax efficient than if you rebalanced the sector-specific ETFs yourself.

Peer comparison

This is an equal weight sector. How about comparing it to equal market weighting by stock positions rather than sectors? Both approaches would provide a different return profile than market value weighting. When comparing EQL to Invesco’s S&P 500 Equal Weight ETF (RSP), which equates weights at the individual stock level rather than the sector level, we find that EQL has outperformed since the 2021 RSP.

Whether this will continue is a question mark. I don’t have a real opinion in which environments equal-weighted sectors vs. equal-weighted stocks might shine, but in both cases, both the RSP and EQL underperformed the S&P 500 because that is market cap-weighted and the cycle has favored that over any weighting approach. last.

Pros and Cons

On the positive side? Because the fund is equally weighted, I would argue that the product is better diversified because it eliminates concentration in any single sector. This is important in risky market environments, when the poor performance of one sector (technology in today’s environment) can significantly impact portfolio performance. Moreover, because the fund is rebalanced to its equal fundamental weights quarterly, its quarterly pruning of winners and allocation to laggards helps generate some outperformance potential, on a relative buy-low, sell-high basis.

On the downside? The fund’s relative underweight exposure to many high-growth sectors, such as information technology, versus market capitalization-weighted indices such as the S&P 500, means it lags in periods like these. One could argue that this is the cost of diversifying the sector, moving forward positively. But this is something you should consider before customizing here. Also remember that EQL is not just an ETF but an ETF of ETFs. This means there are management fees and then the underlying property fees, which, as mentioned earlier, can easily be replicated in your own portfolio.

Conclusion

Unlike typical sector-weighted ETFs that place a heavy weight allocation toward the sector’s most popular companies and stocks, the ALPS Equal Sector Weight ETF systematically allocates an equal percentage of the portfolio to each of the 11 S&P sectors. With EQL, whether a sector is hot or not, you still invest equal amounts in all sectors. EQL can be an excellent option for investors who want well-diversified exposure to the large-cap US stock market.

but? I don’t really understand this point, as you can easily do it yourself. I think sector weighting approaches like this can be interesting, and I’m not sure you need an entire ETF to do it for you. This is a pass for me for that reason.

Expect crashes, corrections and bear markets

Are you tired of being a passive investor and ready to take control of your financial future? Introducing the Lead-Lag Report, an award-winning research tool designed to give you a competitive advantage.

The Lead-Lag Report is your daily resource for identifying risk drivers, uncovering high-return ideas, and getting valuable macro feedback. Stay ahead of the game with important insights into leaders, laggards, and everything in between.

Move from risk-taking to risk-averse with ease and confidence. Subscribe to the Lead Lag Report today.

Click here to access and try the Lead-Lag report free for 14 days.