Leaner, Meaner Sector ETFs

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 Quote) is $99.78 billion, but only $25.84 billion for the similar Rydex S&P Equal Weight Industrials (RGI Quote).

Rydex first did this with an S&P 500 fund, the Rydex S&P Equal Weight Index Fund (RSP Quote). In addition to the industrial fund, it has now brought to market:

Rydex S&P Equal Weight Consumer Discretionary (RCD Quote)

Rydex S&P Equal Weight Consumer Staples (RHS Quote)

Rydex S&P Equal Weight Energy (RYE Quote)

Rydex S&P Equal Weight Financial (RYF Quote)

Rydex S&P Equal Weight Health Care (RYH Quote)

Rydex S&P Equal Weight Materials (RTM Quote)

Rydex S&P Equal Weight Technology (RCD Quote) (RYT)

Rydex S&P Equal Weight Utilities (RYU Quote), 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.

Citigroup (C Quote) is the largest holding in most of the financial sector ETFs, with a 9.11% weight in the Financial Select Sector SPDR (XLF Quote) and a 7.73% weight in the iShares DJ Financial Sector Index Fund (IYF Quote). 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.

Exxon Mobil (XOM Quote) is the behemoth in the various energy sector ETFs. It has a whopping 23.16% weight in the Energy Sector SPDR (XLE Quote) and a 24.27% weight in the iShares DJ Energy Sector Fund (IYE Quote) 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.