There has been a flurry of new exchange traded funds coming to market in recent months, but one ETF that quietly debuted at the end of 2014 has rapidly gained a following among investors.
Less than two months after coming to market, the PowerShares Russell 1000 Equal Weight Portfolio (NYSEArca: EQAL) can lay claim to being one of the more successful ETFs to debut in 2014. Nearly $118 million, $117.7 million to be precise, in assets under management confirm as much.
To say EQAL’s asset growth has been impressive is an understatement. On Feb. 10, the ETF had $47 million in assets, but over the past month, investors have poured nearly $113 million into the rookie ETF, according to PowerShares data. Just four other other PowerShares ETFs have seen larger inflows over that period.
Several reasons explain EQAL’s quick success, including the ETF expanding on the popular equal-weight theme. Investors have poured billions of dollars into various equal-weight ETFs over the years, but there can be more to equal-weight ETFs than merely assigning the same allocation to each of the fund’s holdings.
The new ETF offers investors an evolved approach to the prosaic equal-weight ETFs that currently populate the market. EQAL tracks the Russell 1000 Equal Weight Index, which applies an equal weight to nine sectors and then assigns an equal weight to each security from those sectors. [New ETF, New way to Eqaul Weighting]
The methodology that backs EQAL’s underlying index also mandates that the share portion of a potential constituent in a notional $5 billion portfolio cannot exceed 5% of the company’s float, ensures liquidity and that the benchmark remains investable. [Looking at Alternatively-Weighted ETFs]
Translation: EQAL is evolved equal weighting in action. The ETF’s index methodology “helps mitigate the sector biases inherent in a constituent equal-weight approach. This methodology also enables the index to contra-trade against the most recent price movements at the sector level as well as at the constituent level as the index rebalances,” according to a note by PowerShares.
EQAL’s recent returns highlight the effectiveness of its strategy. Over the past month, the ETF is up 5.7%, or 140 basis points ahead of the traditionally-weighted iShares Russell 1000 ETF (NYSEArca: IWB).
Some of that advantage is attributable to EQAL’s sector weighting strategy. Technology and financial services combine for 36% of of IWB’s weight, but it takes three sectors – technology, industrials and energy – to exceed 36% of EQAL’s weight. Additionally, EQAL’s weight of 8.3% to richly valued, interest rate-sensitive utilities stocks is nearly 250 basis points below the weight the rival Guggenheim Russell 1000 Equal Weight ETF (NYSEArca: EWRI) assigns to the same sector. [Draper Talks Index Construction]
EQAL has another advantage: Cost, or lack thereof. The ETF’s 0.2% annual expense ratio is half that of well-known, broad market equal-weight ETFs.
PowerShares Russell 1000 Equal Weight Portfolio
