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The U.S. market was off to a great start this year and continued to climb on an improving economy, solid retail and jobs data and growing investor confidence. Some concerns about the Fed stimulus led to a brief pause in the rally in the past two months, but it appears that the longer-term bullish trend for stocks is still intact.

In such a backdrop, a broad play on the equity markets can give investors exposure to this trend. While cap-weighted counterparts are certainly good options, a more targeted play could be warranted by looking at the often overlooked ‘Equal Weight ETFs’.

Equal Weight ETFs not only go a long way in reducing overall risk, but also provide significant upside potential, mainly thanks to their equal allocation towards the entire spectrum of securities in similar amounts. While these funds minimize concentration risk, these charge a hefty expense ratio compared to the fundamentally/capitalization weighted counterpart (read: Are Equal Weight ETFs Worth The Cost?).

The best thing about this approach is that performance is not heavily dependent on the returns of a particular stock or group of securities. Furthermore, with quarterly rebalancing, equally-weighted funds tend to cash in on the overvalued segments and reinvest in the underperforming ones, potentially locking in gains from outperforming stocks.

However, investors should note that there are some downsides to the structure. If trends in sectors continue over multiple quarters, the equal-weight funds could be laggards, while a similar situation could arise in declining and risk-off markets.

Yet for investors looking for a new way to play in the current market, a look at the top ranked equal weight ETFs could be a good idea (see more in the Zacks ETF Center).

Top Ranked Equal Weight ETF in Focus

We have found a number of ETFs that have Zacks ETF Ranks of 1 or 2 in the equal weight space and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).

Below, we present three funds that we believe to be the best choices to tap into the space. This trio has enjoyed strong momentum over the past one-year time frame, and has potentially superior weighting methodologies which could allow it to continue leading in the months ahead.

Guggenheim S&P 500 Equal Weight ETF (RSP)

Investors looking for equal allocations in the stocks of the S&P 500 index could find RSP an exciting pick. The fund tracks the S&P Equal Weight Index, putting roughly 0.2% in each stock.

From a sectors look, the product is widely spread across consumer discretionary and financials which make up for 16.5% share each while information technology, industrials and healthcare also receive double-digit allocations.

The ETF charges 40 basis points in fees per year from investors, and has managed $4.6 billion in total assets. This suggests that it is a relatively popular fund and that bid/ask spreads should be extremely tight overall.

RSP has fetched 22.29% in terms of returns on a year-to-date basis, which is higher than SPY by roughly 270 basis points over the same period (read: 6 ETFs Beating the Market Over the Past Year). Fortunately, long-term trends also favor the ETF, as it has crushed SPY in the trailing five-year period, adding about 69.71% compared to a 49.10% for the market cap weighted version.

The ETF currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ with ‘High’ risk outlook, suggesting that it is positioned to outperform similar competitors in the future as well (read: Zacks ETF Rank Guide).

Guggenheim S&P 500 Equal Weight Industrials ETF (RGI)

This ETF provides a targeted bet on one of the most cyclical sectors in the U.S. market that has recently attracted investors’ attention and confidence amidst current global economic uncertainties.

The industrial sector is expected to be malaise prime winner in the current market environment, and could lead stocks higher in an upswing. The sector is seeing strength from improving domestic demand for industrial equipment, expanding manufacturing activity, rising exports and growing orders (read: 3 Industrial ETFs to Buy After Solid GE Earnings).

RGI follows the S&P 500 Equal Weight Index Industrials, holding 62 stocks in the basket that are weighed equally at just under 1.7% each. From an industrial look, the fund is tilted towards machinery that make up for one-fourth share in the basket while aerospace & defense and commercial service & suppliers round off to the next two spots at 18.11% and 14.45%, respectively.

The product has accumulated $49.4 million in its asset base while volume is very light indicating a wide bid/ask spread, while the fund charges 50 bps in fees and expenses. In terms of performance, the ETF has delivered solid returns of 20% so far this year, slightly lower than the ultra-popular, Industrial Select Sector SPDR (XLI - ETF report) but above the SPY.

However, over the trailing five-year period, RGI returned more than 51% compared to 46% gains for XLI. The fund currently has a Zacks ETF Rank of 2 or ‘Buy’ with a ‘Low’ risk outlook.

Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD)

This underappreciated ETF offers exposure across the consumer discretionary market with an equal weight methodology. Consumer discretionary sector has proven itself a market leader over the past few months as the labor market showed clear signs of healing.

Further, a rising housing market and surging stocks added to the “wealth effect” that resulted in increased consumer confidence. This solid trend is expected to continue in the second half of the year as well, encouraging many investors to remain invested in this sector (read: 3 Top Ranked Consumer ETFs to Buy Now).

Holding 83 securities in its basket, RCD tracks the S&P 500 Equal Weight Index Consumer Discretionary index with none of the security holding more than 1.4% of the total assets. In terms of industries, specialty retail takes the top spot at roughly one-fifth of the total, followed by modest allocations to media and hotel restaurants.

The fund has amassed $75.4 million in AUM. Expenses are a bit steep at 50 basis points a year, while volume is a little light, though the liquid nature of the underlying holdings should keep bid/ask spreads tight.

The ETF currently has a Zacks ETF Rank of 2 or ‘Buy’ with ‘High’ risk outlook (read: Time to Buy This High Ranked Consumer ETF?). The fund has gained nearly 28% year-to-date and 133.5% in the trailing five-year period, easily outpacing the broad sector fund, Consumer Discretionary Select Sector SPDR Fund (XLY - ETF report) and SPY by wide margins.

Bottom Line

Investors have probably overlooked these equal weighted ETFs to play the surging S&P 500 space (read: Beat the Market with 'Pure' ETF Strategies). The funds are bit costly when compared to other choices in the space, while volume isn’t great. But neither should be a big problem considering their solid track records over long time frames.

So, investors looking for large cap exposure should consider these products in their portfolio to avoid company specific risk and enjoy diversification benefits. These ETFs are the top rated ones that have beaten similar products this year and could lead to close out 2013 as well.

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