Direxion, the Newton, Mass.-based money manager known for its triple-exposure ETFs, launched an equal-weighted ETF that tracks the Nasdaq 100 Index, adding another fund to a pocket of the investment universe previously occupied by two First Trust ETFs.
The Direxion Nasdaq 100 Equal Weighted Index Shares (NYSEArca:QQQE - News) comes with a total expense ratio of 0.35 percent, which includes a fee waiver of 20 basis ponts through April 1, 2013. The First Trust Nasdaq-100 Equal Weighted ETF (NYSEArca:QQEW - News) is a direct competitor with Direxion’s new fund, and at 0.60 percent, is pricier too.
The new Direxion fund, QQQE, and First Trust’s QQEW are based on the Nasdaq 100 Equal Weighted Index. First Trust also markets the equal-weighted First Trust Nasdaq-100 Technology ETF (NYSEArca:QTEC - News), which is more tightly focused on the tech sector than the broader Nasdaq 100 index. QTEC, which is organized around the Nasdaq-100 Technology Sector Index, also costs 0.60 percent a year.
Direxion’s QQQE uses a representative sampling strategy to follow its equal-weighted version of the Nasdaq-100 index, a collection of the largest domestic and international nonfinancial, Nasdaq-listed companies based on market capitalization. While cap weighting determines the amount of a given company’s stock in a portfolio based on that company’s market value, equal weighting assigns each company the same exposure regardless of its size.
Equal weighting generally underweights large stock but overweights a larger number of smaller stocks, and helps to avoid sector concentration. However it can result in a more volatility because of its tilt toward smaller-cap companies that generally are added and removed from the index with much greater regularity than large capitalized ones. One huge difference is that the equal-weighted Nasdaq-100 holds just around 1.00 percent of Apple Inc. (NasdaqGS:AAPL - News), while Apple makes up nearly a fifth of the full Nasdaq-100 index.
Under normal circumstances, QQQE invests at least 80 percent of its net assets in the equity securities that comprise the index and/or investments that have economic characteristics similar to those of the securities that comprise the underlying index. The ETF may also invest up to 20 percent of its assets in financial instruments that provide leveraged and unleveraged exposure to the index, including options, futures contracts, forward contracts and reverse repurchase agreements.
The underlying index is rebalanced quarterly and reconstituted annually. QQQE repositions its portfolio in response to assets flowing in and out of it, which can result in high portfolio turnover and higher transaction costs, in addition to higher taxes when the ETF’s shares are held in a taxable account. Another way the ETF may be repositioned is if the underlying index adds or removes a security.
The principal risks of this ETF include the fact that it’s nondiversified, which means that it invests a high percentage of its assets in a limited number of securities. A nondiversified fund’s net asset values and total returns may fluctuate more or fall further in times of weaker markets than a conventional diversified fund.
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