NEW YORK (ETF Digest) -- During the highly anticipated launch of the iPad 3, Apple (AAPL) CEO Tim Cook pointed out that in the last quarter, its flagship iPad sold more units -- 15.4 million to HP's (HPQ) 15.1 million -- than any other PC manufacturer sold PCs. It appears that the post-PC era is nearly upon us, and it's being ushered in by a truly transformational company. So now is probably as good a time as any to take a look at the effect this juggernaut is having not just in the world of technology, but on ETFs.Just recently Apple passed up Exxon Mobil ( XOM) to become the most valuable publicly held company in the world by market capitalization, at a staggering $504 billion (as of March 8). This astonishing public valuation has had some unexpected effects that investors should be aware of. Chief among them is the risk of overconcentration, as a great many indices and the ETFs that track them are weighted by market cap.
The Guggenheim S&P 500 Equal Weight Technology ETF ( RYT), on the other hand, is a very different story. Because it tracks the S&P 500 Information Technology Equal Weight Index, no company receives an allocation higher than 1.89%. Indeed, Apple isn't even the number one holding of this fund (at 1.71%, it's fourth), instead the fund's number one holding (1.89%) is LSI Logic Corporation ( LSI) with a measly $4.83 billion market cap; not even a hundredth of Apple's. This means that rises or falls in Apple's share price do not affect the fund much more than swings in any other holding's share price.
Compare the correlation between AAPL (blue), QQQ (red), XLK (green), and RYT (yellow). In the first two examples (QQQ and XLK), Apple's influence on the fund is so enormous that it approaches 20% of the funds' holdings. This can be dangerous for investors who already hold Apple, or who are invested in other ETFs that hold Apple, because this can lead to over-concentration. A rise or fall in Apple can end up greatly affecting a number of investments in this way. The old adage still holds true: you don't want to put too many eggs in one basket. As Apple's market cap has exploded, it has become weighted more and more heavily in a variety of funds, from broad-based large caps like QQQ, to sector-specific funds like XLK. In contrast, because RYT is equally weighted, Apple's influence on the ETF's price is minimized. An investor in this fund gains fairly equal exposure not just to immense companies like Apple, but also to smaller companies.