Why This Equal-Weight ETF Matters Now

For an extended period, technology has been the primary driver of S&P 500 and ETF earnings via the Magnificent 7 and a handful of other companies. While that’s been a point of contention for some critics, it’s hard to argue with returns. The S&P 500 returned 75.8% for the three years ending Sept. 18.

Still, it’d be positive to see more sectors making stronger contribution to domestic earnings per share (EPS) growth. Some experts believe that situation is materializing. If that’s true, it could represent opportunity with funds such as the ALPS Equal Sector Weight ETF (EQL).

In a scenario under which earnings breadth improves at the sector level, EQL could prove particularly beneficial to investors because as the ETF’s name implies, it equally weights sectors. That playbook differs from competing equal-weight ETFs, many of which equally weight individual holdings. The difference is material. Over the past three years, EQL beat the S&P 500 Equal Weight Index by 850 basis points with 150 basis points less in the way of annualized volatility.

EQL Earnings Opportunity

With the third quarter drawing to close in a matter of days, another earnings season is on the way and that could open the door to opportunity with EQL because expectations are in place that other groups beyond tech are poised to get in on the positive EPS action.

“We’ve been bullish on the S&P 500. I think that continues, but I do see signs that it’s not just about AI and tech,” noted Bank of America’s head of U.S. equity and quantitative strategy, Savita Subramanian, in a recent CNBC interview.

Subramanian highlighted commodities-related sectors – energy, industrials and materials – as potential pockets of opportunity and that’s important when discussing EQL because those sectors combine for about 27% of the ETF’s weight compared with a combined allocation of just 14% in the cap-weighted S&P 500.

In fact, two of the top three sectors in terms of third-quarter earnings growth are expected to be materials and utilities (the other is tech). That speaks to EQL’s benefits because materials and utilities stocks represent barely more than 4% of the cap-weighted S&P 500.

The ALPS ETF is pertinent heading into earnings season for another: the number of companies issuing negative EPS guidance for the third quarter is below the five-year average while the number of S&P 500 member delivering positive EPS outlooks is ahead of the five-year average, according to FactSet. That could bode well for EQL as an earnings season play.

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