RYT - RYT: An Ideal Time For Equal-Weighted Tech Exposure And This ETF Delivers

2023-06-06 13:35:46 ET

Summary

• I recommend RYT a Buy due to its differentiated equal-weighted approach and diversified portfolio structure.
• RYT is well-positioned to benefit from the projected growth in the technology sector, particularly in the automotive and semiconductor industries.
• Despite potential risks from industry-specific focus and global semiconductor shortage, RYT can serve as a beneficial counterbalance to a portfolio dominated by market-cap-weighted funds.

I rate Invesco S&P 500 Equal Weight Technology ETF (RYT) a Buy. Technology has been one of the fastest growing industries for decades. The US tech industry is expected to grow by over 5% in 2023. It is the second fastest-growing industry in the US, behind only healthcare ( ZIPPIA ). Big Tech significantly underperformed in 2022 as a result of economic uncertainty and increased competition, which set the stage for 2023's fierce tech-led rally through May.

That is great for tech investors, but when it comes to ETFs, nearly all of the choices are market capitalization weighted, which means the largest companies dominate the holdings and drive the performance. RYT's equal weighted approach differentiates it from the tech ETF masses. This structure is especially helpful in this sector as investors will likely look increasingly toward investing in technology ETFs that are not entirely dominated by the very largest businesses.

Among top technology ETFs, RYT is especially notable. With an AUM of almost $3 billion, the fund is quite small compared to major players in the industry. With its differentiated approach, I anticipate that it may have the potential to be undervalued as an underdog among top tech ETFs. Alongside this, the fund is decently liquid as it dabbles in high-volume traded companies like Nvidia (NVDA) and Microsoft (MFST).

Despite the implications posed by macroeconomic conditions and concerns over inflation, RYT is well-positioned to take advantage of the projected growth within the technology sector, especially in the automotive industry. The fund is also especially sensitive to conditions in the semiconductor space, where projections tend to be favorable in the long term, but are subject to a short term shortage .

Strategy

Launched and managed in 2006 by Invesco Capital Management, this ETF primarily invests in large-cap Information Technology companies. It aims to track and replicate the performance of the S&P 500 Equal Weight Information Technology Index. The fund aims to provide investors with a vehicle to gain broad and balanced exposure to the technology companies that make up the S&P 500. It achieves this by employing an equal weighting strategy, meaning that it aims to equally represent all stocks, regardless of size. This ultimately provides a more balanced exposure for all technology companies that RYT invests in, making it so that each company has an equal impact on the fund's performance.

Holdings analysis

RYT's holdings consist entirely of securities within the technology sector The fund includes 66 total stocks, including stocks in the Software, Semiconductor, and IT spaces, to name a few. However, its equally weighted approach balances out with its narrow industry focus. With the top 10 holdings only constituting less than 20% of the entire index. With the top holding, NVIDIA, only comprising 2% of the entire index, there is very little volatility that may be attributed to the performance of a single stock. This strategy provides opportunity for higher returns, especially when smaller companies do well.

Strengths

RYT is a heavily under-covered ETF. With an AUM of almost $3B, it is operating at a significantly lower value than its peers, namely XLK and VGT, sitting at $44B and $48B AUM, respectively. However, as seen in the chart below, RYT is the only equally-weighted name amid the 13 technology ETFs currently trading.

History shows that investors have historically strongly favored market cap weighted ETFs like XLK and VGT, and others even prefer fully semiconductor ETFs like SMH and SOXX. Market cap-weighted ETFs are dominating the industry, and RYT's equal weighted approach is a standout ETF that more authentically captures the true state of the tech industry. Numerous investors are hyper-focused on the most popular funds with the biggest numbers. However, RYT could pick up momentum sooner rather than later when investors realize the benefit of a true industry-representative ETF.

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RYT also benefits from having strong liquidity. With companies like NVDA and MFST as the two largest players in its portfolio, RYT will likely benefit from having strong liquidity because of these large and well-known companies acting as leaders in the entire technology industry trading at high volumes in the market. Furthermore, despite having a lower AUM compared to its competitors, its AUM has experienced significant growth throughout the past year as shown in the graph below. This growth suggests that more investors are buying into RYT, increasing its trading volume, translating to higher liquidity.

Weaknesses

Provided that RYT benefits from its equally weighted approach, its portfolio of strictly technology stocks can be an important weakness to consider. Although the portfolio is very diversified within various sectors in the technology space, future growth can still experience high levels of volatility. This is because the technology sector is characterized by rapid changes in growth and innovation. However, RYT's equally weighted portfolio of both growth and large-cap stocks should be an effective mitigant for this. However, given RYT's larger emphasis on growth stocks compared to peer technology ETFs, they are expected to grow at an above average rate compared to other markets. This also means that they are very sensitive to economic cycles, and if the macroeconomic conditions continue to worsen into a recession, these growth stocks can fall drastically.

With that being said, RYT's AUM of less than $3 Billion does put it at an inherent disadvantage compared to its peers like VGT and XLK. RYT can suffer from weaker liquidity, with lower trading volumes. This also shows that there is substantially less investor interest in RYT than its bigger competitors. RYT's expense ratio of 0.40% is also significantly higher than both VGT and XLK, at both 0.10%. RYT's total return rate closely matched both peers throughout this past year, but in the last few months of 2023, the fund's total return growth has increased at a lower rate compared to both.

Forward-looking industry projections

RYT also stands to benefit from favorable market projections and developments. The technology sector is projected to grow at 5.4% in 2023 to grow to $4.5 trillion as opposed to 2.4% in 2022. Despite a looming economic downturn, the technology sector is expected to remain intact in the long term. At the time the article was published in February of 2023, the main concern in the sector was with rising prices and the threat of inflation. However, the inflation rate sits at a comfortable 4.9% today as opposed to a peak of 9.1% 10 months ago. This will increase consumer spending as a whole, which can only benefit the technology sector.

Furthermore, RYT can only benefit from anticipated automotive transformation and shift towards electric vehicles with more advancements in autonomous driving technologies. Given that 32% of RYT's portfolio is in the semiconductor space (32%), the fund is likely to profit from this trend. Semiconductors are a crucial component used in the development of electric vehicles and autonomous driving technologies, and their demand is expected to increase as electric vehicles become more prevalent in the future.

Semiconductors play a critical role

While RYT's substantial focus on semiconductors can be a driver of growth for the fund in the long run, there is also currently a global semiconductor shortage that may hurt the fund in the near term. The global semiconductor revenue is expected to decline by 11.2% in 2023, and the shortage is even expected to last into 2023 and 2024 according to JPM analysts . This shortage can affect a wide range of industries, primarily the automotive industry mentioned above. However, I sense this issue to be a minor one, as the shortage has already done its damage in 2022 and the first half of 2023. With the AI revolution happening, there should be more demand for semiconductors , making this a pressing issue across various industries that will resolve itself in the long term.

Conclusion

RYT is particularly attractive to me due to its differentiated structure from its more popular peers. Its equal weighted approach and diversified portfolio structure may mitigate industry or macroeconomic risks. I believe that this ETF effectively captures the technology sector as a whole, and has the potential to grow alongside the sector. However, given its industry-specific focus, I would recommend incorporating RYT into a diversified portfolio, so that it mitigates sector-specific risks. Overall, RYT serves as a beneficial counterbalance to a portfolio dominated by market-cap weighted funds, and can ultimately contribute to the diversification of a portfolio.

I rate RYT a buy, with a relatively long-term time frame in mind. The fund invests a substantial amount in the semiconductor sector, a space that is projected to grow significantly in the coming years. Overall, despite both a volatility risk and temporary setback from semiconductors, this ETF is still poised to profit from its equal-weighted approach amid positive industry and macroeconomic trends. RYT has been experiencing substantial growth in the past year, and I expect this growth to continue for the years to come.

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