July 23, 2009

Does Equal Weighting Sectors Work?

The ALPS Equal Sector Weight ETF (EQL) owns each of the nine Select Sector SPDR ETFs in equal weights, and the nine ETFs are rebalanced back to equal weight on a quarterly basis.

The ALPS Equal Sector Weight ETF (EQL) has just launched. The new fund is an ETF of ETFs that delivers exposure to the U.S. large-cap equity market by investing equal proportions in each of the nine Select Sector SPDRs.

The nine Select Sector funds are: the Consumer Discretionary Select Sector SPDR Fund (XLY), Consumer Staples Select Sector SPDR Fund (XLP), Energy Select Sector SPDR Fund (XLE), Financial Select Sector SPDR Fund (XLF), Health Care Select Sector SPDR Fund (XLV), Industrial Select Sector SPDR Fund (XLI), Materials Select Sector SPDR Fund (XLB), Technology Select Sector SPDR Fund (XLK) and Utilities Select Sector SPDR Fund (XLU).

EQL is benchmarked to the Banc of America Securities-Merrill Lynch Equal Sector Weight Index. It owns each of the nine Select Sector SPDR ETFs in equal weights. The nine Select Sector SPDR ETFs are rebalanced back to equal weight on a quarterly basis.

"Most equal-weight indexes are based at the stock level," says Jeremy Held, ALPS director of product research. "EQL is an important extension of the equal-weight concept in that it addresses sector risk, which we consider to be a much more important and fundamental risk to client portfolios than individual stocks.

"Over the last 30 years the largest annual declines in the S&P 500 have been precipitated by a crash in the market's largest sector," explains Held. "In 1981, it was energy stocks. In 2000, it was technology. Most recently in 2008, it was the financial sector.

"An equal sector strategy minimizes the negative impact of any one sector by diversifying over multiple sectors. At the same time, by offering meaningful exposure to each sector of the market, it allows investors the ability to participate in market rallies regardless of where they occur," Held concludes.

EQL will be the second ETF sponsored by ALPS, which is well-known as a third-party distributor and asset servicing resource to the investment management industry. ALPS is also the sponsor of the Cohen & Steers Global Real Estate ETF (GRI), launched in May of 2008.

According to the prospectus, EQL's annual expense ratio is 0.55 percent.

Reprints Discuss this story
This is where the comments go.