The Direxion Nasdaq-100 Equal Weighted Index Shares fund (NYSEArca:QQQE - News) charges 0.35 percent, severely undercutting the First Trust Nasdaq-100 Equal Weighted ETF (NYSEArca:QQEW - News) at 0.60 percent.
Both funds track the Nasdaq-100 Equal Weighted Index. Neither uses leverage.
First Trust’s QQEW is an established fund with middling assets in the neighborhood of $100 million. The Direxion folks must figure that a much lower hurdle will win some investor dollars from QQEW and maybe attract new interest in the strategy.
On paper at least, the strategy—an equal-weighted approach to the Nasdaq-100—makes sense in two ways.
First, the Nasdaq-100 is notoriously concentrated:Apple is currently around 19 percent. An equal-weighted index brings that down to about 1 percent, which significantly reduces single-stock blowup risk if Apple’s remarkable run fizzles out.
Second, when equal weighting is applied to a shallow universe, 100 stocks in this case, the typical risk factors that come from this strategy—small-cap bias and increased beta—are mitigated when compared to equal-weighting a deeper universe.
Performance data over the past three years indeed suggest only slightly elevated risk for the equal-weighted strategy relative to the plain-vanilla Nasdaq-100. I found beta of 1.06 for the period using daily returns.
But unfortunately, the returns for the equal-weighted strategy lagged the Apple-dominated regular Nasdaq-100 for the period, doubtless due to AAPL’s rock-star performance.
Looking at total return index data, “NETR,” the equal-weighted Nasdaq-100 index (light blue), returned 130.8 percent for the period, while “XNDX,” the plain-vanilla Nasdaq-100 index (dark blue), returned 136.2 percent.
Bear in mind that for much of this period, AAPL’s share of the plain Nasdaq-100 was even bigger than it is now. In this context, that fact that the equal-weighted strategy even kept pace is notable.
Still, more risk for less return isn’t typically the road to riches.
Turning to sector exposure, the breakdowns are a bit unexpected. I’m using Bloomberg data for First Trust’s QQEW and the PowerShares QQQ Trust (NasdaqGM:QQQ - News) as proxies for the equal-weighted and vanilla versions of the Nasdaq-100. (I’m assuming QQEW’s and QQQE’s exposure are quite similar.)
With Apple at a much lower weight, broad tech-sector exposure for the equal-weighted approach is reduced, in favor of consumer stocks.
While the equal-weighted strategy is still dominated by tech, this relative bias toward consumer stocks may turn some investors off. After all, people associate Nasdaq with tech, not with consumer stocks.
To sum up:Let’s face it, any vehicle that underweights Apple just isn’t going to look good when comparing recent performance. QQQE and QQEW are effectively betting against the tech giant, relatively speaking, while still maintaining broad—if somewhat diluted—tech exposure.
For those who buy the equal-weighted thesis and like QQQE’s lower fee, there are some practical points to note.
Even without such anomalies, spreads for new funds like QQQE might be wider than those for established funds.
The takeaway? Use limit orders when trading to make sure your expense ratio savings aren’t wiped out by unexpected execution costs.
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