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Summary

  • An equal-weight ETF alternative to capturing the health care sector.
  • A closer examination of Guggenheim Equal-Weight Health Care ETF.
  • How the Guggenheim health care ETF differs from traditional cap-weighted index funds.

By Todd Shriber & Tom Lydon

Well-documented has been the ongoing ascent of health care ETFs. The Health Care Select Sector SPDR (NYSEArca: XLV), the largest health care ETF, entered Friday's session with a 2014 gain of nearly 16%.

XLV resides just pennies below the all-time high the fund touched earlier in the week. Other health care ETFs have benefited from the sector's ongoing upside (XLV has more than doubled over the past three years) and that includes plenty of funds that eschew the cap-weighted methodology.

While there is considerable consternation and debate surrounding the terminology "smart beta," not all non-cap weighted ETFs fit the bill as smart beta. Equal-weight ETFs are just that, equally-weighted. Fortunately, that terminology has been met with considerably less resistance. More importantly, equal-weight ETFs offer opportunity at the sector as highlighted by the Guggenheim S&P Equal Weight Healthcare ETF (NYSEArca: RYH).

RYH has $321.6 million in assets under management, of which $113 million has come into the ETF just this quarter, highlighting investors' willingness to embrace more than just the usual health care ETF fare.

That willingness has been rewarded as RYH entered Friday with a year-to-date gain of 17.4%. Earlier today, the ETF touched another new all-time high.

"As is the case with other equally weighted funds, RYH offers slightly more of a small- and mid-cap tilt than its market-cap-weighted peers. For example, 25% of RYH's portfolio consists of mid-cap names, compared with just 5% of XLV and 12% of VHT. RYH is only slightly more volatile than its cap-weighted counterparts," said Morningstar analyst Robert Goldsborough in a note out earlier this week.

Investors should note RYH's equal-weight methodology turns up some very different weights compared to XLV at the sub-sector level. For example, XLV has ridden the tide of pharmaceuticals and biotech companies, a combined 65.2% of that ETF's weight.

RYH's allocation to those industries is 37.5%, but the equal-weight offering ratchets up exposure to health care equipment, providers and services names. The ETF's weight to health care services providers is almost 26%, about 1,000 basis points above XLV's weight to that group, and enough to give RYH healthy leverage to sector upside created by Obamacare.

Although RYH is lighter on blue chip pharma names compared to its cap-weighted counterparts, the ETF does not short change investors when it comes to high-quality firms with deep competitive advantages.

"RYH also invests in a significant number of high-quality health-care firms, devoting 45% of assets to wide-moat companies, 46% to narrow-moat firms, and just 8% to companies with no economic moat," according to Goldsborough.

Guggenheim S&P Equal Weight Healthcare ETF

(click to enlarge)

Source: Equal-Weight Works With Health Care ETFs