Market Overview

Where Equal Weight Is Working

Where Equal Weight Is Working

On average, Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL) are up about 7 percent this year.

That's good news for the major cap-weighted technology exchange traded funds because those funds typically feature massive weights to those to companies.

What Happened

Due in part to the strength of Apple and Microsoft, the Technology Select Sector SPDR (NYSE: XLK) and the Vanguard Information Technology ETF (NYSE: VGT) entered Wednesday with an average year-to-date gain of 13.15 percent.

That sounds nice and it is, but the average 2019 gain offered by VGT and XLK is well behind that of the Invesco S&P 500 Equal Weight Technology ETF (NYSE: RYT). RYT came into Wednesday up 17 percent since the start of 2019.

Why It's Important

The $1.53 billion RYT follows the S&P 500 Equal Weight Information Technology Index, the equal-weight equivalent of XLK's underlying index. None of RYT's 68 holdings exceed weights of 1.75 percent and the ETF features no exposure to small-cap stocks, a relevant point because the size factor is often highlighted as one of the primary reasons equal-weight strategies outperform cap-weighted rivals.

RYT does, however, allocate about 32 percent of its weight to mid-cap stocks. While mid-cap names take on increased importance in RYT, the fund's volatility traits compare favorably to cap-weighted rivals. This year, RYT's annualized volatility is well below that of XLK and VGT and over the past three years, the equal-weight tech ETF's annualized volatility was slightly below that of its cap-weighted competitors.

Over those three years, RYT outperformed VGT by 370 basis points while being 60 basis points less volatile. That is not a new trend. RYT has consistently outperformed its cap-weighted benchmark over the past decade.

What's Next

Past performance is never a guarantee of future returns, but even with a combined weight of just 2.68 percent to Apple and Microsoft, RYT is just 3.34 percent below its 52-week high. Technology services providers and semiconductor makers combine for over 54 percent of RYT's roster, so those should be the areas investors focus on when considering RYT.

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