S&P 500 Index ETF Gets 'Equal' Treatment

NEW YORK (TheStreet) -- In the sliced-and-diced world of exchange traded funds, there's been a genuine breakthrough: the ALPS Equal Sector Weight ETF(EQL Quote). The fund is an ETF that holds the nine Select Sector SPDRs in equal parts at 11.1%, subject to a quarterly rebalancing.

For anyone unfamiliar with the Select Sector SPDRs, State Street in 1993 created the S&P 500 SPDR(SPY Quote) and followed it up with funds for nine of the 10 biggest sectors. (Tech and telecom are combined in one fund.)

The ALPS Equal Sector Weight ETF does away with the stock market's natural weighting of the sectors. (If one industry does well, it tends to gain a bigger weighting in the S&P 500.) That differs from the Rydex S&P Equal Weight(RSP Quote), which targets the same 0.2% weight for each of the index's 500 stocks.

The biggest benefit of the ALPS fund is that holders may be underweight in the next sector to take down the equity market. Before the tech bubble popped in 2000, that industry had grown to represent 30% of the index. At the peak of the financial bubble (the peak in prices of financial stocks), that sector accounted for 23% of the S&P 500. At their respective lows, each of those industries had fallen by more than half. Equal weighting of the sectors would have resulted in less exposure to the "wrong" stocks, sparing investors from the brunt of market crashes.

The fund's fact sheet shows that from Dec. 31, 1998, investors would have been better off by equal-weighting sectors. The back test benefits from being, at various times, underweight in technology, overweight in energy and underweight in financials. In periods of poor equity performance, equal weighting seems likely to outperform.