The ETF industry continues to evolve before our eyes, with a new line of nine sector ETFs from Rydex debuting Tuesday. Instead of weighting by market cap, like the first generation of sector ETFs, or by a fundamental measure like dividend yield, the Rydex funds weight stocks equally.
The practical effect is that the biggest stocks by market cap will have less of an influence on returns. The mega caps usually don't provide leadership until the end of the stock market cycle, so it makes sense to have a tilt towards smaller companies most of the time.
Equal weighting of the funds brings the average market cap down considerably. The average market cap for the
Industrial Select Sector SPDR
(XLI) is $99.78 billion, but only $25.84 billion for the similar
Rydex S&P Equal Weight Industrials
Rydex first did this with an S&P 500 fund, the
Rydex S&P Equal Weight Index Fund
(RSP). In addition to the industrial fund, it has now brought to market:
Rydex S&P Equal Weight Consumer Discretionary
Rydex S&P Equal Weight Consumer Staples
Rydex S&P Equal Weight Energy
Rydex S&P Equal Weight Financial
Rydex S&P Equal Weight Health Care
Rydex S&P Equal Weight Materials
Rydex S&P Equal Weight Technology
Rydex S&P Equal Weight Utilities
(RYU), which includes the telecom sector.
These ETFs are based on S&P equal weight sector indices created several years ago. They should be similar to the sector SPDRs from StateStreet in terms of holdings, except for the fact that the sector SPDRs are cap weighted.
(C - Get Report)
is the largest holding in most of the financial sector ETFs, with a 9.11% weight in the
Financial Select Sector SPDR
and a 7.73% weight in the
iShares DJ Financial Sector Index Fund
. Citigroup only has a 1.13% weight in the equal weight fund. Since Citigroup has lagged the Financial Sector SPDR by about 9% year to date, the lighter weighting in Citi is probably a good thing.
(XOM - Get Report)
is the behemoth in the various energy sector ETFs. It has a whopping 23.16% weight in the
Energy Sector SPDR
and a 24.27% weight in the
iShares DJ Energy Sector Fund
compared to just 3.5% in the equal weight energy ETF. Exxon Mobil has lagged the sector, as measured by the energy SPDR, by a wide margin for most of the bull market for energy of the last few years, but Exxon Mobil has led the sector for the last three months.