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An Equal-Weight ETF Approach to the Nasdaq


Investors who believe that smaller tech names can begin to pull their weight can utilize an equal-weight Nasdaq-100 exchange traded fund to capture potential growth opportunities of more mid-sized companies.

For instance, the Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) and First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW) take an equally-weighted approach to the popular Powershares QQQ (QQQ) , which tracks a cap-weighted Nasdaq-100 index.

As the appellation suggests, each of QQQE and QQEW’s underlying holdings make up more or less 1% of the overall portfolios. Consequently, due to the weighting methodology, the two ETFs include a much larger tilt toward mid-sized companies.

Specifically, QQQE’s market capitalization weights include mega-caps 17.5%, large-caps 46.6% and mid-caps 35.9%. QQEW’s weights include mega-caps 17.3%, large-caps 46.6% and mid-caps 36.2%. In contrast, QQQ’s holdings include 59.2% mega-caps, 31.1% large-caps and 9.7% mid-caps.

Due to the equally weighted methodology, QQQE and QQEW, with their greater focus on smaller and more nimble companies, could outperform mega-cap stocks during bull markets, but investors will have to be comfortable with potentially greater risks.

The equal-weight ETFs also show a slightly smaller focus on technology names and a greater tilt toward other sectors, compared to QQQ. For instance, QQQE and QQEW have a 41.0% and 41.6% position, respectively, in technology whereas QQQ shows a 56.2% weight in tech. Meanwhile, QQQE and QQEW include about a 2% to 5% larger focus on other sectors, including consumer discretionary, telecom, industrials, consumer staples and healthcare.

Additionally, the equal-weight indexing method helps emphasis more undervalued stocks, since market-cap-weighted methodologies typically overweight larger components that have been outperforming. In contrast, the equal-weighting methodology would rebalance on a regular basis, selling recent winners and buying recent losers to maintain its equal tilt.

However, potential investors should be aware that due to its more frequent rebalancing, the equal-weight index-based ETFs could incur greater turnover rates, compared the market-cap-weighted Nasdaq-100 ETF. Due to the extra portfolio management, the equal-weight ETFs are also slightly more expensive. QQQE has a 0.35% expense ratio and QQEW has a 0.6% expense ratio, compared to QQQ’s 0.2% expense ratio.

Over the past three months, QQQE has increased 6.1% and QQEW gained 5.9% while QQQ was up 5.0%. Both equal-weight Nasadq ETFs are trading near all-time highs.

For more information on the Nasdaq, visit our Nasdaq category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of QQQ.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.