The tech sector has trounced the broader market in the second quarter. So, it’s not surprising some market participants are growing concerned about concentration risks. Those worries are valid.
Consider the case of the cap-weighted version of the S&P 500 Technology Index. Just three stocks — Nvidia (NVDA), Microsoft (MSFT) and Apple (AAPL) — combine for more than 41% of that benchmark. Though less discussed than concentration risk by way of specific securities, there’s also factor concentration. Translation: Many cap-weighted tech ETFs and indexes are heavily rooted in the momentum factor. That factor is prone to sharp reversals at a moment’s notice.
Investors looking to mitigate those risks while remaining engaged with tech may find the Invesco S&P 500 Equal Weight Technology ETF (RSPT) useful. The fund, which doesn’t allocate more than 1.85% to any of its 71 holdings, is up 9.49% year-to-date. Arguably, that’s an impressive showing when considering the ETF isn’t driven by the sector’s biggest names.
RSPT Limits Momentum Risk
Like any other factor, momentum has its pros and cons. Investors on the correct side of a momentum trade can accrue significant rewards. Conversely, momentum can be fickle. When it wanes, market participants can feel some pain. Avoiding that pain or, at the very least, reducing its sting, can be accomplished with RSPT.
RSPT does that by way of some of the hallmarks investors are familiar with as it relates to equal-weight ETFs. Those include factor tilts toward size and value and reduced dependence on momentum.
