November 7, 2006

Equal Weight ETFs Seek to Reduce Single-Stock Risk

Nine new funds from Rydex offer full sector exposure

The big risk for investors looking for exposure to the full spectrum of economic sectors the traditional risk has been overexposure to any individual stock. With that in mind, Rydex has announced the launch of a family of nine ETFs based on the S&P Equal Weight Sector Indexes, traded on the American Stock Exchange. The new ETFs provide investors with exposure to the consumer discretionary, consumer staples, energy, financial services, healthcare, industrial, basic materials, technology, and utilities sectors.

Unlike capitalization-weighted funds, which give more weight to the largest stocks within an index, Rydex S&P Equal Weight Sector ETFs divide all stocks equally regardless of market capitalization in an attempt to give a more accurate representation of a given sector. Rydex uses equal weighting to help avoid single-stock risk, provide more exposure to smaller sector stocks and potentially improve the new ETFs' chances of outperforming their cap-weighted peers. For example, in the consumer staples sector, Procter & Gamble Co. represents 17.31% of its relevant index versus just 2.59% in the equal-weight version, which mitigates the dominance of a few large stocks.

"Although the comparative returns and volatilities of the weighting methods might differ during market cycles, we've seen that, over time, equal weighting tends to outperform cap weighting," said Tim Meyer, ETF business line manager at Rydex Investments in a release announcing the launch. "We believe investors who are looking for true exposure to a sector versus overexposure to a handful of stocks will appreciate the equal-weight methodology behind Rydex S&P Equal Weight Sector ETFs."

To maintain their equal weightings, the new ETFs rely on disciplined quarterly rebalancing, which may promote greater internal diversification and a relatively higher exposure to value stocks.

With the addition of the new ETFs, Rydex's product lineup now boasts some two dozen offerings with combined assets approaching $3 billion. More than $1.6 billion of those assets are in the Rydex S&P Equal Weight ETF, which pioneered the concept of equal weighting in 2003.

(For another approach to index investing, see the IA Interview with Rob Arnott in the November issue, or listen to the podcast.)

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