It May Be Time To Look At This ETF Of... ETFs

Equally weighting securities is one of the oldest and most widely used alternatives to weighting securities by market capitalization. There are hundreds of equal-weight exchange traded funds on the market today.

Some go beyond equally weighting stocks or bonds, offering investors exposure to an equal-weight basket of other ETFs. The ALPS Equal Sector Weight ETF EQL is one of the most venerable names in that group.

What Happened

The $140.6 million EQL, which debuted in July 2009, “delivers exposure to the US Large Cap Equity market by investing equal proportions in each of the 10 Select Sector SPDRs and rebalances quarterly,” according to ALPS.

EQL holds 10 of the 11 sector SPDR ETFs, including the Health Care Select Sector SPDR XLV, Technology Select Sector SPDR XLK and the Financial Select Sector SPDR XLF.

Weights of the sector SPDR ETFs in EQL range from 8.68 percent for the Utilities Select Sector SPDR XLU to 9.24 percent for XLV, as of Dec. 31, 2018.

Why It's Important

Rare are the occasions that EQL has a comparable rating to the traditional S&P 500, but AltaVista Research currently rates EQL Neutral, the same rating the research firm has on the S&P 500. EQL's ALTAR score of 7.1 percent is slightly higher than the 6.9 percent AltaVista has on the S&P 500.

AltaVista's Neutral rating implies average appreciation potential and “indicates that valuations adequately reflect the fundamentals of stocks in these funds,” according to the research firm.

EQL lost about 8 percent last year.

What's Next

As an equal-weight sector ETF, EQL is underweight technology relative to the S&P 500 and doesn't include the Consumer Discretionary Select Sector SPDR XLY. Those features coupled with overweight positions in defensive sector ETFs, such as XLU, could help EQL if markets favor lower beta fare in 2019.

“Equal sector weighting aims to systematically avoid the excesses of the cap-weighted benchmark (e.g. Tech bubble, Financial Crisis) making it ideal for 'set-it-and-forget-it' investors who prefer somewhat less volatile returns,” said AltaVista. “And now may be a good time to make the switch: for the first time in 3 years EQL ranks higher--though just slightly--than the S&P 500 SPDR. Meanwhile it maintains a bit of a value & income tilt, providing some safety in volatile markets.”

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