Rydex Investments launched nine equal-weight sector exchange-traded funds (ETFs) onto the American Stock Exchange (AMEX) on Tuesday, November 7, as the company looked to build on the success of its stunningly popular S&P 500 Equal-Weight ETF (AMEX: RSP). That fund, which holds all the stocks in the S&P 500 in equal amounts, debuted in 2003 and has racked up more than $1.6 billion in assets, all-the-while handily outperforming the straight S&P 500 Index. In fact, RSP was recently awarded Morningstar's highest honor for a mutual fund - five stars - for its most recent three-year performance.
The new funds aim to build on that success by dividing the S&P 500 along sector lines. The funds break the index into nine of the ten traditional Global Industry Classification System (GICS) sectors -- the Information Technology and Telecom sectors are combined into a single "Technology" fund - and then hold the stocks in equal weights, rebalancing quarterly. They function, more or less, as subsets of the broader RSP.
For investors, the upside includes a built-in mid-cap tilt and a portfolio that is not dominated by a few mega-cap companies, as well as the mixed benefits of a regular rebalancing schedule.
The funds and tickers are as follows:
Consumer Discretionary (Amex: RCD)
Consumer Staples (Amex: RHS)
Financial Services (Amex: RYF)
Healthcare (Amex: RGI)
Industrial (Amex: RGI)
Basic Materials (Amex: RYT)
Technology (Amex: RTM)
Utilities (Amex: RYU)
"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," says Tim Meyer, ETF business line manager at Rydex Investments. "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."
The mega-cap concentration could be a strong selling point for the funds, as a few companies really do dominate certain sectors. For instance, two names represent nearly 41 percent of the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE): Exxon-Mobil at 23.7 percent and Chevron at 17.1 percent. In the new fund, those numbers are reduced into the single digits.
The timing of the launch could be somewhat tough, however, as many experts expect large-cap stocks to take a long awaited turn leading the market higher. But given the tremendous interest in the original equal-weight fund, the new sector ETFs are likely to be a hit too.