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This Tweaked Index Fund Has Been Trouncing the S&P 500

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some large-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Guggenheim S&P 500 Equal Weight ETF (NYSEMKT: RSP  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is a relatively low 0.40%.

This ETF has performed rather well, beating the conventionally weighted (that is, market cap-weighted) S&P 500 index fund over the past three, five, and 10 years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why large companies, and why equal weighting?
Large companies can add some ballast to your collection. Many may not grow as briskly as their smaller counterparts but, in order to reach their current size, they likely have some strong assets and features. And some can grow quite briskly. Meanwhile, a market cap-weighted S&P 500 index will have more than 2.5% of its value in Apple and ExxonMobil and a far tinier percentage in the index's smallest holdings. The equal-weighted index gives each component an equal influence in the index's performance.

Lots of S&P 500 component companies had strong performances over the past year. Electronic memory specialist Micron Technology (NASDAQ: MU  ) , for example, soared 107% and is not far from a 52-week high despite the weak PC market. Micron's purchase of Japanese manufacturer Elpida has some investors quite optimistic, as it enhances Micron's capacity, its pricing power, and its relationship with Apple. Some worry, though, about competition, the industry's cyclicality, and Micron's debtlevels. The company beat expectations for both revenue and earnings in its last quarter.

Corning (NYSE: GLW  ) surged 34%, recently posting a solid second quarter, with core revenue and earnings rising by double digitsand several business segments, such as telecommunications, life sciences, and display technologies, growing briskly. Its Gorilla Glassis selling well, and Corning's partnership with View and its tint-adjusting glass is promising. Some also hope to see Gorilla Glass incorporated in automobiles in the future. Corning has upped its dividend recently, and it now yields 2.7%. Its dividend has doubled in less than three years, while the company has been boosting its share repurchase program. The stock seems attractively priced, with a forward P/E near 10.

Other companies didn't do quite as well over the last year, but could see their fortunes change in the coming years. Cliffs Natural Resources (NYSE: CLF  ) sank 43%. Its 2.5% dividend yield is the result of a 76% dividend cut earlier this year. The company has struggled along with the coal market, but some are optimistic, expecting coal prices to rebound and demand to grow, especially abroad. (Cliffs' CEO recently noted that China has some iron ore inventory levels near multiyear lows, and industrial production in China has been picking up.) The stock has fallen so far that some see it as attractive now, but others worry about significant debt and negative free cash flow, and have shorted the stock. On the plus side, Cliffs has inked a long-term iron ore-pellet deal, and recently reached a three-year labor agreement with Canadian workers.

CenturyLink (NYSE: CTL  ) shed 15% and yields an appealing 6.4%. That reflects a dividend cut of about 25% as the telecom concern focuses more on share buybacks, and some fear the dividend could be cut further. The company landed a hefty Pentagon contract in April, with a possible 10-year value of $750 million, and has been moving into promising arenas such as cloud computing. Having merged with Qwest, CenturyLink has substantial debt, topping $19 billion but also free cash flow near $3 billion annually. The company's second quarter featured earnings beating expectations but revenues lagging them, while management lowered expectations for the rest of the year.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

If you'd like to learn about more ETFs, including some particularly promising ones, check out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.

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Related Tickers

9/30/2016 4:00 PM
CLF $5.85 Down -0.01 -0.17%
Cliffs Natural Res… CAPS Rating: ***
CTL $27.43 Down -0.09 -0.33%
CenturyLink CAPS Rating: **
GLW $23.65 Up +0.13 +0.55%
Corning CAPS Rating: *****
MU $17.78 Up +0.24 +1.37%
Micron Technology CAPS Rating: ***
RSP $83.59 Up +0.68 +0.82%
Rydex S and P Equa… CAPS Rating: ****