Few market challenges may pose as intriguing a one right now as concentration risk. While inflation and rising rates earn the most media attention and headlines, many portfolios have relied on just 10 or so stocks from the S&P 500, particularly in tech, for their growth.
That creates a “concentration” risk for portfolios and a particular challenge as those concentrated stocks have also been some of the most positive. The large-cap ETF EPS’ weighting approach may help.
The strategy, the WisdomTree U.S. LargeCap Fund (EPS), navigates concentration risk in an intriguing way. Part of the concentration risk problem stems from how most big indexes use a market-cap-weighting approach. Weighting big indexes like the S&P 500 by market cap only worsens a “narrow leadership” market phenomenon.
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In a scenario in which a big market-cap-weighted index does well, investors are “punished” for sticking to diversification and not leaning heavily on just a few names. Those big names that lead indexes may also lack strong fundamentals, yet the narrow market means success for those big names and not the majority of other firms.
How Large Cap ETF EPS Invests
Changing to an earnings weighting approach can help. An earnings weighting approach can counter “runaway multiple expansion.” Rather than wait for great future earnings, investors pay for great earnings when they’re happening. That’s where a large-cap ETF like EPS can play an intriguing role.
The fund provides exposure to big firms but with that earnings weighting twist. It contains the 500 largest U.S. firms but puts much more emphasis on trailing profits. That can help address concentration risk. EPS has a long track record, having launched in 2007, and charges just 8 basis points (bps) for its approach.
That approach has also helped it return 13.4% YTD and 22.9% over one year. Taken together, its different weighting view to some of the key stocks in this year’s market narrative may make it an ETF to watch.
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