Roger Nusbaum submits: Rydex issued nine sector ETFs that are equal-weighted. This differs from the other sector ETFs that weight by market cap or some fundamental screen. The result of market cap weighting or most fundamental weighting is that the largest stocks have the heaviest exposure, even in the fundamental funds. For example Exxon Mobil makes up 23% of the RAFI Energy ETF (PRFE), GE is 20% of the RAFI Industrial ETF (PRFN), although I will say that the RAFI Financial ETF (PRFF) is not lopsided in this manner.
The equal-weight funds offer access to sectors in a way that should be different than what exists now. I wrote an article for TheStreet.com that you can read here without a subscription that goes into more detail about the composition method.
I think these funds are a great addition to the do-it-yourselfers' arsenal. By offering sector access without mega cap lopsidedness, investors can change they way they construct different sectors within their portfolios. Sticking with energy: Exxon Mobil badly lagged sector the vast majority of the recent/current bull market. During the last three months, though, it has significantly outperformed. Mega caps tend to lag for most of the stock market cycle. An investor not wanting single stock risk could buy the equal weight ETF and then later in the cycle either rotate into a cap-weighted ETF or just buy a few shares of Exxon -- either one brings the same effect, but there is less tax consequence from keeping the same ETF and then adding or subtracting one stock.
Further I think the equal weight ETFs could also complement the use of a sub-sector ETF or two along with a stock from a part of the sector that is not otherwise ETF-able. There may also be a way to work in the WisdomTree foreign ETF too.
I am convinced that the utility of new products that come to market in combination with some of the old standbys will give the chance for better diversity with little or no single stock risk.
Related: Here are the nine new equal-weight sector ETFs:
- Rydex S&P Equal Weight Index Fund (NYSEARCA:RSP)
- Rydex S&P Equal Weight Consumer Discretionary (NYSEARCA:RCD)
- Rydex S&P Equal Weight Consumer Staples (NYSEARCA:RHS)
- Rydex S&P Equal Weight Energy (NYSEARCA:RYE)
- Rydex S&P Equal Weight Financial (NYSEARCA:RYF)
- Rydex S&P Equal Weight Health Care (NYSEARCA:RYH)
- Rydex S&P Equal Weight Materials (NYSEARCA:RTM)
- Rydex S&P Equal Weight Technology (NYSEARCA:RYT)
- Rydex S&P Equal Weight Utilities (NYSEARCA:RYU)