U.S. Investing

Diversify Your Consumer Discretionary Holdings with this ETF

Investors are becoming increasingly familiar with the idea that market-cap weighting can result in massive investments in just a few companies that dominate a particular index.

The NASDAQ is a perfect example. Investing in the NASDAQ as an index results in an investment of close to 30% in just three companies: Apple (NASDAQ:AAPL), Microsoft (MSFT) and Amazon (NASDAQ:AMZN).

Although not every index has this extreme imbalance, typically when we look to invest in an index, it’s with the hope of gaining broad and diverse exposure to a number of companies. It is one of the advantages of exchange-traded funds (ETFs).

One strategy to recapture this advantage is the use of equal weighting, a practice in which a fund invests equal sums in all components of an index. This is how we get investment vehicles like Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD). This fund is a cross between the equal weight concept and a sector ETF. However, unlike some equal weight funds, it will not have much allocation to very small companies, since such companies do not exist in the S&P 500 index.

Like much of the market, this fund has had a great last 12 months. It is up nearly 94% during that period. It also has increased close to 20% in value this calendar year. The fund’s 0.40% expense ratio is in the typical range. Plus, RCD currently manages just under $950 million. The dividend yield is about 1%.

Chart courtesy of StockCharts.com

There are more than 60 companies held in this fund. Notably, the equal-weighting strategy prevents returns from being dominated by Amazon. RCD holds equal weight in an assortment of U.S.-based consumer discretionary names like Home Depot (NYSE:HD), Target (NYSE:TGT), D.R. Horton (NYSE:DHI) and Dollar General (NYSE:DG).

The increased allocation outside of mega-cap stocks due to this fund’s strategy means that the average market cap of its holdings is less than a fifth of the segment benchmark. This can be a good or a bad thing, depending on your feelings about the continued profit potential of massive companies like Amazon. If equal weighting sounds like a potentially profitable angle on the consumer discretionary sector, consider whether Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD) is right for your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.