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Don't Forget This Equal-Weight ETF

ETF Professor

Give the Invesco QQQ (NASDAQ: QQQ), the Nasdaq-100 Index tracking exchange traded fund, some credit. Despite the strain of Apple Inc. (NASDAQ: AAPL), QQQ's third-largest holding at a weight of 9.08 percent, being slightly lower to start 2019, the ETF is up 5.70 percent year-to-date.

Another Nasdaq-100 tracking ETF is having its say in the debate.

What Happened

The Direxion NASDAQ-100 Equal Weighted Index Shares (NYSE: QQQE), the equal-weight alternative to QQQ, is off to a stellar start this year with a gain of 9.10 percent. QQQE follows the NASDAQ-100 Equal Weighted TR Index.

That index “includes 100 of the largest non-financial securities listed on NASDAQ, but instead of being weighted by market capitalization, each of the constituents is initially set at 1 percent,” according to Direxion.

Why It's Important

Equal-weight ETFs such as QQQE relieve some of the concentration associated with cap-weighted funds like QQQ. The risk is that when big-name stocks, say Apple or Amazon.com Inc. (NASDAQ: AMZN), drive the Nasda-100 Index higher, QQQE could trail the cap-weighted benchmark. Over the past three years, QQQE did lag QQQ, but the former did have less annualized volatility than the latter.

With Apple scuffling to start the year, QQQE's advantages are getting another look. The fund's start to the year is all the more impressive when considering Microsoft Corp. (NASDAQ: MSFT) and Amazon, which combine for over 18 percent of the cap-weighted Nasdaq-100, are trading higher.

“If you’re holding any of the NASDAQ-100 market-cap weighted funds, you have a highly weighted position in Apple and a majority weighting in the information technology sector!,” said Direxion. “Apple is also the top holding of any index fund position you hold that tracks the S&P 500 Index. So much for diversifying away from single-security risk.”

What's Next

The technology and communication services sectors combine for about two-thirds of the cap-weighted Nasdaq-100 Index, but just about 51 percent of QQQE. QQQE is noticeably overweight healthcare and industrial stocks relative to the traditional Nasdaq-100.

Investors added $22.58 million to QQQE last year.

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