Unequal Sector Coverage in ETFs

[jalanlong]

Does anyone worry about how uneven the sector coverage is in most US Market ETFs? If you are invested in the VTI Total Market Index, you have only 3% in Energy Stocks and 5% in Consumer Staple stocks but you have 25% in Technology stocks. That is not a good weighting in 2022. If you are in traditional index funds then you have missed out completely on the energy run up this year. Even Vanguard Value ETF only holds 6% in Energy and holds 10% in Tech.

Most Equal Weight ETFs do not help this because they are equal weighting an index like the S&P 500 which is still heavy tech and low on "value" stocks like energy and utilities. The only solution seems to be to create your own basket of stocks or sector ETFs and equal weight them.

[I Shrugged]

Recently I've been a little concerned about the concentration of index value in the top 5 or 10 stocks. But overall I took HB's advice literally that I should own the highest flying blue chip growth stocks, and the SP500 is that.

[Smith1776]

I wouldn't worry about uneven sector coverage. To the extent to which we worry about that, we are assuming we know more than the market, which we probably don't.

I'd say the best antidote is to add some factor ETFs.

[ppnewbie]

I’ve only ever heard of equal weight sp500 not total markets funds.

[Smith1776]

For what it's worth, VVL, which is the value weighted ETF I hold, has been holding steady so far this year. VEQT, which is a global market cap weighted fund, by contrast, has basically tanked.

The heavy tech weighting the OP is referring to is a big culprit.

[perfect_simulation]

Does anyone worry about how uneven the sector coverage is in most US Market ETFs?

Nope, the S&P 500 is self-healing. Failing companies create space for others

[ochotona]

From its inception in 2003, RSP (S&P500 equal-weight ETF) has beaten SPY / IVV / VOO. I think the value vs growth argument by the OP is compelling. Equal weight is MORE AGNOSTIC than an implicit tilt toward growth. If you're truly honest with yourself, and you truly believe this statement - "I don't know which factors or assets will outperform in coming years" - why wouldn't you choose the more agnostic one, especially since it has been proven with 20+ years of data to outperform over several bear / bull market cycles? You have to be internally self-consistent or else you'll have a crisis when the market has a crisis, and you'll panic out.

[boglerdude]

Cap weight is equal weight. You own 1% of Amazon and 1% of Joe's vegan taco stand.

[ochotona]

Cap weight is equal weight. You own 1% of Amazon and 1% of Joe's vegan taco stand.

Equal weight means your portfolio has the same dollar amount of Amazon and of Joe's vegan taco stand.

Go to RSP Page at Invesco and look at detailed holdings. It's the same dollar amount for the largest firms as for the smallest.

[Jack Jones]

I think the value vs growth argument by the OP is compelling. Equal weight is MORE AGNOSTIC than an implicit tilt toward growth. If you're truly honest with yourself, and you truly believe this statement - "I don't know which factors or assets will outperform in coming years" - why wouldn't you choose the more agnostic one, especially since it has been proven with 20+ years of data to outperform over several bear / bull market cycles?

Volatile Stock-Market Investments
It may strike some investors as a little strange to suggest volatile stock-market investments for a Permanent Portfolio, whose first purpose is safety. But the portfolio would be less safe without them.

You need gold to protect against inflation. But when inflation is minor or falling, gold can take a beating. That's when stocks take over; but the stock-market investments need to be powerful enough to overcome the losses to gold and pull the entire portfolio upward.

[Tyler]

FYI -- I published a new post today that reviewed portfolio returns in the first half of 2022, and it included a section on this topic.

Halfway to Nowhere: 2022 Mid-Year Portfolio Rankings

Be sure to take a look at the "stock sectors" chart in the article and think about what the resulting mix would look like with a 50/50 combination of both funds. If you're looking for a simple way to balance out the sector bias inherent in many large cap funds, supplementing them with a small cap value ETF is pretty straightforward and gets the job done. It's one more reason I personally like SCV in the Golden Butterfly.

[Smith1776]

FYI -- I published a new post today that reviewed portfolio returns in the first half of 2022, and it included a section on this topic.

Halfway to Nowhere: 2022 Mid-Year Portfolio Rankings

Be sure to take a look at the "stock sectors" chart in the article and think about what the resulting mix would look like with a 50/50 combination of both funds. If you're looking for a simple way to balance out the sector bias inherent in many large cap funds, supplementing them with a small cap value ETF is pretty straightforward and gets the job done. It's one more reason I personally like SCV in the Golden Butterfly.

Another great article where you hit it out of the park, Tyler! Excellent work.

[johnnywitt]

Or, just weight energy and whatever else in a VP. That's my strategy.
My theory is, if you're going to run a HBPP, then run it as close to the OG as you possibly can, given the newer Capital Controls with banking and possible limitations with your retirement accounts and so on.

[Dieter]

FYI -- I published a new post today that reviewed portfolio returns in the first half of 2022, and it included a section on this topic.

Halfway to Nowhere: 2022 Mid-Year Portfolio Rankings

Be sure to take a look at the "stock sectors" chart in the article and think about what the resulting mix would look like with a 50/50 combination of both funds. If you're looking for a simple way to balance out the sector bias inherent in many large cap funds, supplementing them with a small cap value ETF is pretty straightforward and gets the job done. It's one more reason I personally like SCV in the Golden Butterfly.

Excellent article

Thanks!

Definitely one of the reasons I hold SCV

Too bad I didn’t (and still don’t) own an energy sector fund this year

And that gold ain’t doing what I had hoped

[jalanlong]

FYI -- I published a new post today that reviewed portfolio returns in the first half of 2022, and it included a section on this topic.

Halfway to Nowhere: 2022 Mid-Year Portfolio Rankings

Be sure to take a look at the "stock sectors" chart in the article and think about what the resulting mix would look like with a 50/50 combination of both funds. If you're looking for a simple way to balance out the sector bias inherent in many large cap funds, supplementing them with a small cap value ETF is pretty straightforward and gets the job done. It's one more reason I personally like SCV in the Golden Butterfly.

Even a combination of LC and SCV gets you skewed sector coverage. A large cap growth ETF is mostly focused on technology and health care. A small cap value ETF is mostly focused on Financials and Industrials. So in each case you are getting virtually no exposure to energy stocks much less utilities or consumer staples. A 50/50 mix of large cap growth and small cap value gives you about 3% exposure to energy stocks and 4% exposure to consumer staple stocks while giving you 25% exposure to technology and 13% exposure to financial stocks. That balance is a bad one to have in 2022.

[Kbg]

An SCV (or SP600) ETF combined with QQQ is a really excellent stock mix I think.

[Maddy]

It's not just the sector bias that troubles me. The S&P 500 indices look like a bet on a small handful of popular tech stocks.