Tech Jitters Could Highlight Perks of EQL

The AI/megacap growth trade isn’t dead. But price action on November 20 suggests even Nvidia’s (NVDA) recent earnings report may not provide enough near-term excitement to fuel the tech sector. That doesn’t mean investors forsake equities outright. Fortunately, more balanced ETFs such as the ALPS Equal Sector Weight ETF (EQL) can keep market participants invested while reducing tech-related risks.

The fund equally weights the 11 global industry classification standard (GICS) sectors. That means its weight to tech stocks is less than a third of what the cap-weighted version of the S&P 500 devotes to that sector.

Another way of looking at EQL, at least over the near-term, is a trait that was once a headwind for the ETF – low tech exposure – is now an advantage. However, that’s not the end of this ETF’s perks.

Myriad Benefits of EQL

As its name implies, EQL equally weights sectors. That makes it a departure from many equal-weight ETFs, which typically apply equal weighting to stocks. EQL’s approach can bear fruit for long-term investors.

“Both equal-sector and equal-stock weighting methodologies reduce the heavy concentration risk of the mega-cap companies in the S&P 500, however, equal-sector weighting provides an advantage by preserving the weights of the higher market-cap leaders within each sector while equal-stock weight tends to overemphasize the lower market-cap laggards within each sector,” according to ALPS research. “Equal-sector weighting shows a better balance of returns between the top and bottom quartiles, relative to equal-stock weighting.”

Remembering that past performance doesn’t guarantee future returns, advisors and investors  considering EQL should not ignore the fact that historical data confirms over long holding periods, equally weighting sectors has been the better bet relative to equally weighting individual securities.

EQL offers end users another, arguably overlooked, benefit. As concentration increases in cap-weighted indexes, as is the case today, it’s possible that volatility will also rise because the index’s balance is being disrupted by increased allocations to a small number of stocks. EQL can reduce that risk.

The ETF “provides greater exposure to the bulk of the US large-cap universe, while demonstrating less volatility and smaller drawdowns than an equal-stock weighted portfolio on the S&P 500 that tends to witness greater peaks and valleys in performance caused by inordinate sector bets,” added ALPS.

Home to nearly $526 million in assets under management, EQL has an annual expense ratio of 0.27%, or $27 on a $10,000 investment.

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