Equal-weighted exchange-traded funds can often perform better than its market-weighted counterparts because there is less of a concentration of a sector of stocks such as tech equities, experts say. In a market-weighted ETF or mutual fund such as the S&P 500, the index contains more of the best-performing large stocks than the smaller or medium companies. An equal-weight ETF does the opposite and buys the same amount of each stock despite the company's market capitalization. The amount of diversification is lowered when an index is based only on market cap, says Alex Chalekian, CEO of Lake Avenue Financial. "Diversification is important especially in a volatile market," he says. Here are seven top-performing equal weight ETFs.
Invesco S&P 500 Equal Weight ETF
Risk-averse investors can look to Invesco S&P 500 Equal Weight ETF (RSP), since it tracks the S&P 500 Equal Weight Index and has an expense ratio of 0.02%. "You get the added benefit of even more diversification by avoiding heavy concentration in any one area of the market," says Mike Loewengart, chief investment officer at E-Trade Financial. Investors mistakenly believe that market-weighted ETFs that track the S&P 500 (.SPX) consist of the 500 companies equally, but that's not the case, Chalekian says. From April 2000 through March 2002, the S&P 500 experienced a 21.5% loss during the tech bubble. In the same time frame, an equally-weighted portfolio returned a 25.3% gain.
First Trust NASDAQ-100 Equal Weighted Fund
The First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW) tracks the Nasdaq-100 Equal Weighted Index and each stock and the expense ratio is 0.6%. The fund's five-year return is 12.03% while the Nasdaq-100 Equal Weighted Index returned 12.72%, lower than the Nasdaq-100 Index at 16.4%. The fund's return is higher than the S&P 500, with a return of 10.71%. "Equally-weighted indices allow a fund or ETF the opportunity to create an index of their own investments, all at equal weight," says Mike Molitoris, CEO of Flagship Wealth Management Group in Cary, North Carolina. "It negates the opportunity for a sector or capitalization from adversely impacting the index and the fund."
Direxion NASDAQ-100 Equal Weighted Index Shares ETF
QQQE is relatively inexpensive, with a 0.35% expense ratio. The five-year return is 12.3% compared to the Nasdaq-100 Index's return of 16.1%. Equal-weighted indexing, such as with funds like QQQE, occurs when the securities are purchased with equal dollar amounts of each stock, says Stuart Michelson, a finance professor at Stetson University. If there is a $100 stock and a $10 stock, the fund will purchase $10,000 of each security. The fund purchases 100 shares of the $100 stock for a total of $10,000 and purchases 1,000 shares of the $10 stock for the same total of $10,000. "The total portfolio of the two would be $20,000 with 50% invested in the first stock and 50% invested in the second stock," he says.
SPDR S&P Biotech ETF
The SPDR S&P Biotech ETF fund (XBI) tracks the S&P Biotechnology Select Industry Index, an equal-weighted index that holds large-, mid- and small-cap stocks within the biotech sector and has an expense ratio of 0.35%. The five-year annualized return is 11.7% compared to the S&P Biotechnology Select Industry Index that returned 11.5% while the 10-year annualized return is 18.2% compared to the biotech index of 18.1%. Its volume of shares traded is about 1.4 million. "Besides expense ratios, liquidity is very important," Chalekian says. "You need to make sure that you don't get into a fund or ETF (with) very little volume. This way you don't get a bad price when you're trying to execute a trade."
ETFMG Prime Cyber Security ETF
"Equal-weighted indexes benefits include the higher growth potential of small-cap and mid-cap stocks because of a larger investment in these higher return firms," Michelson says. On the flip side, one drawback of equal-weighted indexes include the higher risk of investing in small-cap firms that can be more volatile, he says. One equal-weight fund experts recommend is the ETFMG Prime Cyber Security ETF (HACK), which carries an expense ratio of 0.6%. The fund's top holdings include cybersecurity infrastructure providers or cybersecurity service providers such as Cisco Systems (CSCO), Splunk (SPLK) and Proofpoint (PFPT).
SPDR S&P Aerospace & Defense ETF
The SPDR S&P Aerospace & Defense ETF (XAR) tracks the S&P Aerospace & Defense Select Industry Index and has an expense ratio of 0.35%. XAR includes large, mid- and small-cap stocks, and Mercury Systems (MRCY) and Teledyne Technologies (TDY) are among its top holdings. The fund's year-to-date return is a healthy 32.5%, although the fund delivered a negative annualized total return of -4.4% in 2018. XAR provides an equal-weight exposure across large-, mid- and small-cap stocks in this sector.
ROBO Global Robotics and Automation Index ETF
The ROBO Global Robotics and Automation Index ETF (ROBO) consists of 95 stocks in the robotics, automation and artificial intelligence industries Hiwin Technologies, Nvidia Corp. (NVDA) and Faro Technologies (FARO) are among the fund's top 10 holdings. ROBO's expense ratio is 0.95%. The funds year-to-date return is a generous 18.3%. The upside for the equal-weighted ETF or fund is the "true diversification among positions as well as sectors, which should shine during a down market," Chalekian says. Investors whose goal is to capture the broad market would find that a market-cap ETF could be a good approach to weighting, Loewengart says. "If you're willing to weather some of the ups and downs of the market, an equal-weight could be more appropriate," he says.
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