Apple (NasdaqGS; AAPL) has been dominating the tech headlines, with good reason as it has the market cap and revenue to push around most of its peers. However, for the exchange traded fund investor who is worried about the heavy hand Apple is playing on their overall portfolio, it may be time to consider an equal-weight methodology instead.
For example, the Dow was up 120 points on Monday afternoon but the Nasdaq Composite was in the red. Much of the divergence was due to the heavy weighting of Apple in the Nasdaq index. Shares of Apple, a hedge fund favorite, were down more than 3% on Monday.
According to a recent Business Insider article, earnings growth for the overall S&P 500 is expected to be 1.4% year-over-year, but if Apple were to be removed from the equation, the overall earnings growth would be closer to zero. [Apple: Why the Nasdaq-100 ETF is Beating the Market]
To put this in perspective, the last time the S&P 500 saw 10% of its 3-month returns from a single component was in 2000.
No stock can weigh more than 5% of the S&P 500 Index, but Apple is an outlier. The company’s growing market capitalization has forced through two index limitations. In ETFs, Apple is also coming in on the ceiling for diversification rules.
Investors seeking a more diversified ETF portfolio, without the heavy weighting in Apple, may consider equal-weight ETFs like the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP - News) , First Trust Nasdaq 100 Equal Weighted Index Fund (NasdaqGM: QQEW - News) and the recently launched Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE - News) . Over the long-term, the equal-weight methodology is expected to outperform since it provides has a higher weighting in small- and mid-cap stocks. For instance, RSP has gained 2.5% over the past 5-years, compared to the 4.2% loss in the SPDR S&P 500 (NYSEArca: SPY - News) . [Direxion’s New Equal-Weight Nasdaq 100 ETF]
Guggenheim S&P 500 Equal Weight ETF
equal-weight ETFs category.
Max Chen contributed to this article.