Traders fail to recognize how NOT diversified the NDX (QQQ) and the SPX (SPY) are.
The top 6 stocks in the NDX make up about 45% of the index.
The SAME 6 stocks make up about 23% of the SPX.
SO, if you own the SPX and NDX, you are ‘Texas Hedging’
On the floor Texas Hedging was when a trader bought calls and stock at the same time or bought puts and sold stock at the same time…
Go BIG or GO HOME.
Most traders and investors do not want to be Texas Hedged.
They want diversity.
This brings me to the SPX Equal Weighted Index.
This index rebalances the sectors of the S&P 500 every quarter (it is still cap weighted like the S&P 500 within each ETF).
Thus, on December 31st of 2020 the index was selling:
XLK and XLY
The Technology and Consumer Discretionary ETFs
And it was buying XLE and XLF.
On the year the S&P 500 is up 1.15%.
The SPX Equal Weighted Index is up just under 5%.
THESE ARE THE SAME STOCKS, it’s just an adjustment in how the portfolio is weighted.
This index trailed the S&P 500 for most of 2020.
As we head out of covid, for traders that are looking to maintain exposure to tech…
…but want to take a heavier exposure in energy, transportation, banks, and the other ‘old economy’ names.
Equal weighting makes a lot of sense.
The most active ETF for equal weighting is RSP.
While not incredibly active, it trades enough that trades can get in and out.
The trend of RSP out performing SPY is something I expect to continue through the 1st half of the year.
With the stock trading 132.20 a trade I like is buying the 132 calls and selling the 138 calls.
The cost is about 2.70, it pays better than 1 to 1 if the RSP keeps the same trend.
I have a very similar play in the hedge fund I am CIO for.
Your Only Option,
Mark Sebastian
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