Using equal-weighted ETFs can help put a small-cap and value tilt on a portfolio.
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
Rick Ferri recently posted an article regarding portfolio tilting and the usage of small-cap and value ETFs. He described a process involving starting an allocation with total market-cap exposure and adding a slice of small-cap value stocks.
For advisors who have existing portfolios allocated toward a mix of different assets classes that may not easily afford switching to an allocation as Ferri described, an alternative way to capture the small/value tilt is through using equal-weighted as opposed to market-cap-weighted ETFs in various asset classes.
I’ll look at a variety of the different equal-weighted ETFs available and how substituting them into an existing portfolio may positively alter the risk/return profile of a portfolio.
The number of equal-weight ETFs and asset classes covered has increased over the past few years. Here is a list of equal-weight ETFs available:
|Ticker||Fund||AUM ($M)||Exp Ratio|
|Large Cap||RSP US||Guggenheim EW S&P 500||8372.2||0.40%|
|EWRI US||Guggenheim EW Russell 1000||115.5||0.40%|
|Mid Cap||EWRM US||Guggenheim EW Russell Midcap||138.3||0.41%|
|Small Cap||EWRS US||Guggenheim EW Russell 2000||40.6||0.41%|
|Nasdaq||QQEW US||First Trust EW Nasdaq 100||428.2||0.60%|
|QQQE US||Direxion EW Nasdaq 100||14.6||0.35%|
|EM||EWEM US||Guggenheim EW MSCI Emerging Markets||14.4||0.60%|
|Sector||RCD US||Guggenheim EW S&P Consumer Discretionary||88.9||0.50%|
|RHS US||Guggenheim EW S&P Consumer Staples||160.4||0.50%|
|RYE US||Guggenheim EW S&P Energy||308.1||0.50%|
|RYF US||Guggenheim EW S&P Financials||100.8||0.50%|
|RYH US||Guggenheim EW S&P Healthcare||224.4||0.50%|
|RGI US||Guggenheim EW S&P Industrials||103.8||0.50%|
|RTM US||Guggenheim EW S&P Materials||90.1||0.50%|
|RYT US||Guggenheim EW S&P Technology||579.8||0.50%|
|RYU US||Guggenheim EW S&P Utility||120.1||0.50%|
|MLP||MLPN US||Credit Suisse EW MLP||926.6||0.85%|
A few other equal-weight ETFs of note, particularly in the large-cap space:
- ALPS Equal Weight ETF (EQL): Holds equal weights in the nine SPDR Sector ETFs
- VelocityShares Equal Risk Weighted Large Cap ETF (ERW | C-72): Applies a proprietary risk weighting to the S&P 500 stocks and equal-weights accordingly
Also, the equal-weighted Russell 1000, midcap and 2000 ETFs named above have two layers of equal weighting. First, each sector is equally weighted, and then within the sector, each individual stock is equally weighted.