One of the big takeaways from the market’s decline in 2022 is that investors should build their portfolios in a different way, said Joe Terranova, chief market strategist at Virtus Investment Partners. “I think there has been a paradigm shift in 2022 … and that’s moving toward equal-weighted strategies,” Terranova said Tuesday on CNBC’s ” Halftime Report .” In such a strategy, an equal amount of money is allocated to each stock in a portfolio. This is notably different from the S & P 500 and Nasdaq Composite , which are weighted based on market cap. Because of this structure, equal-weighted funds end up with relatively less exposure to the market’s largest stocks, and higher exposure to value stocks with lower price-to-earnings multiples. Equal-weighted funds generally outperformed last year. The strategy can also keep portfolios from getting too exposed to hot sectors. Several tech stocks ballooned to massive size over the last decade, which made the equal-weighted funds a relatively safer move when that trend reversed in 2022. Terranova made his comments during a discussion about Tesla , which has declined from a market cap of more than $1 trillion to about $300 million after Tuesday’s share price declines . For investors holding broad index funds weighted based on market cap, Tesla has been a big drag on performance. “I think we are in a moment where you have to go back to looking at equal-weighted strategies and elevating them to the top of your list for investment,” he said. Terranova is not alone in believing in equal-weighted trades right now. Bank of America ETF strategist Jared Woodard listed the Invesco S & P 500 Equal Weight ETF (RSP) as a top trade for 2023. The fund had a total return of -11.6% in 2022, meaning its decline was significantly less than the S & P 500. The lower exposure to tech and growth stocks was a key contributor to that outperformance. Woodard said in a note to clients in November that an equal weight S & P 500 index was underweight tech and communications services by about 15 percentage points. After tech stocks underperformed again in December, value stocks have now made up a lot of ground in the major indexes. However, equal-weighted funds still give investors more exposure to value stocks and areas like energy and materials than broad index funds. Some other equal-weighted ETFs on the market include the Invesco Russell 1000 Equal Weight ETF (EQAL) and the iShares MSCI USA Equal Weighted ETF (EUSA) .
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