You Can Have Almost All The Sectors With This ETF

Sure, plenty of broad market exchange traded funds give investors to a variety of sectors, but no ETF does it quite like the ALPS Equal Weight Sector ETF EQL.

The $128.8 million ALPS Equal Weight Sector ETF, which will celebrate its seventh anniversary in early July, uses a straight forward approach. Simply put, the ALPS Equal Weight Sector ETF holds the nine sector SPDR ETFs on an equal-weight basis. Currently, weights for the nine SPDRs in EQL range from 10.7 percent for the Materials Select Sector SPDR XLB to 11.7 percent for the Utilities Select Sector SPDR XLU.

Utilities stocks and exchange-traded funds faced plenty of challenges last year as the Federal Reserve set the stage for its first interest rate increase in nearly a decade. With the central bank poised to raise borrowing costs several times this year, investors should approach the utilities sector and its ETFs with caution. Sliding oil prices pinched materials stocks and ETFs, making XLB one of the worst-performing sector SPDRs.

As ALPS notes on the EQL website, the ETF's advantages include insulating investors from rapid deterioration in one sector while allowing for participation in broader market upside. Over the past year, EQL is down 7.5 percent compared to a 4.9 percent loss for the S&P 500. Some of EQL's weakness relative to the S&P 500 can undoubtedly be attributed to the ETF's nearly 10.8 percent weight to the Energy Select Sector SPDR XLE. That means EQL's energy weight is nearly 400 basis points above that of the S&P 500.

In a recent note, AltaVista Research rated EQL “neutral.” 

“This indicates that valuations adequately reflect the fundamentals of stocks in these funds,” said the research firm.

Though it has not been confirmed, EQL could take on a different look later this year when real estate becomes its own sector on Aug. 31. Last year, State Street introduced the Real Estate Select Sector SPDR Fund XLRE and the Financial Services Select Sector SPDR XLFS to give advisors and investors avenues for preparing for real estate becoming its own sector. The popular Financial Select Sector SPDR XLF will remain the same.

“Although equal weighting of sectors can result in faster or slower earnings growth versus the S&P500 in any single year, profitability is similar on average. However equal-weighting aims to systematically avoid the excesses of the cap-weighted benchmark (such as the Financial crisis and the Tech bubble before that) making it ideal for 'set-it-and-forget-it' investors who prefer somewhat less volatile returns,” according to AltaVista.