An Equal Dose Of All Sectors

As data highlighting the consistent mediocrity, to put it kindly, of active management underscore, stock-picking is difficult. So is identifying the right sectors at the right time, but the ALPS Equal Weight Sector ETF EQL helps ameliorate that problem.

The ALPS Equal Weight Sector ETF holds the nine sector SPDR exchange traded funds on an equal-weight basis. EQL has not yet added the Financial Services Select Sector SPDR XLFS and the Real Estate Select Sector SPDR XLRE, the most recent additions to the sector SPDR suite.

As ALPS notes on the EQL website, the ETF's advantages include insulating investors from rapid deterioration in one sector while allowing for participation in broader market upside. Over the past year, EQL is down 7.5 percent compared to a 4.9 percent loss for the S&P 500. Some of EQL's weakness relative to the S&P 500 can undoubtedly be attributed to the ETF's nearly 10.8 percent weight to the Energy Select Sector SPDR XLE. That means EQL's energy weight is nearly 400 basis points above that of the S&P 500.

AltaVista Research recently reiterated a neutral rating on EQL, a rating that “dicates that valuations adequately reflect the fundamentals of stocks in these funds. The majority of funds we cover fall into this category.” 

Over the past five years, the healthcare sector, the third-largest sector weight in the S&P 500, has handily outperformed the S&P 1500 Composite Index, delivering better than double the returns of that broader equity benchmark. The Health Care SPDR XLV accounts for about 10.8 percent of EQL's weight.

“Although equal weighting of sectors can result in faster or slower earnings growth versus the S&P500 in any single year, profitability is similar on average. However equal-weighting aims to systematically avoid the excesses of the cap-weighted benchmark (such as the Financial crisis and the Tech bubble before that) making it ideal for 'set-it-and-forget-it' investors who prefer somewhat less volatile returns,” adds AltaVista.

With Treasury yields declining and investors displaying an overt preference for conservative sectors, it is worth noting that EQL allocates over 24 percent of its combined weight to the Utilities Select Sector SPDR XLU and the Consumer Staples Select Sector SPDR XLP.