Shares of Apple Inc. (AAPL) are down nearly 9 percent year-to-date, and that is enough to give some investors pause about investing in the technology sector and its relevant exchange-traded funds. Actually, even the ETFs with massive weights to Apple are holding up pretty well.
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For example, the Technology SPDR (ETF) (XLK), the largest technology sector ETF by assets, is up 3.7 percent year-to-date. That is no small feat when considering XLK's almost 12.7 percent Apple allocation, which makes the stock nearly 300 basis points more significant within XLK than the ETF's second-largest holding.
Some Tech ETFs Step Ahead
That is to say, investors could be doing very well by embracing a technology ETF with scant Apple exposure such as the Guggenheim Invest S&P 500 Eql Wght Tech (RYT). RYT was one of just 19 ETFs to hit all-time highs on Thursday. The Guggenheim ETF is up 5.8 percent year-to-date, putting it well ahead of cap-weighted rivals.
RYT's success is not surprising when considering the success of some other equal-weight sector ETFs. For example, RYT's consumer staples and utilities counterparts have regularly made all-time highs in recent weeks.
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Equal-weight is one of the oldest smart beta strategies and it is endemic of the most frequent criticism of smart beta which is, alpha is almost always generated by virtue of the value or small stock factors. That point has been discredited in recent years, but some so-called experts still drive home the point that equal-weight ETFs outperform, at various points, simply because they feature more exposure to smaller stocks than their cap-weighted counterparts.
On a related note, if the success of an ETF such as RYT is based in large part on small-cap exposure, then it would be reasonable to assume an equal-weight sector ETF exposes investors to significantly more volatility than a cap-weighted equivalent. That is not necessarily true. Over the past three years, RYT's annualized volatility is 15.9 percent, or just 20 basis points more than the rival Vanguard cap-weighted tech ETF.
RYT has outperformed the rival Vanguard ETF by 450 basis points over that period. Translation: RYT has provided superior risk-adjusted returns.
As for Apple, the stock is just 1.42 percent of RYT's weight, meaning it is larger in RYT than just four of the ETF's other holdings. That quartet includes both classes of Google-parent Alphabet Inc (GOOG) (GOOGL)'s shares.
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