Our View
Many allocators see mounting concern with the same issue: market concentration. And while equal-weight approaches are one of the more common strategies for addressing concentration risk, they come with their own set of investment risks and baggage. Investors may want to consider if the benefits of the cure (equal weight) outweigh the drawbacks of the disease (concentration) and whether alternate options make more sense.
Observations
1. Extreme concentration is a hidden risk that has occurred several times in the past 60 years. What’s more, in prior periods of high concentration, the top-five weighted stocks in the S&P 500 Index1 underperformed their lower-weighted counterparts following the periods of extreme concentration (FIGURE 1).
2. But solving for concentration could have unintended consequences: Shifting market-cap and sector allocations can introduce more volatility to your portfolio (FIGURE 2).
3. The Hartford Multifactor US Equity ETF (ROUS) is one possible option that seeks to diversify away from market-cap weighting while mitigating volatility and retaining similar sector exposures (FIGURE 3).
Research
