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 (NYSEArca: QQQE) and First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW) take an equally-weighted approach to the popular Powershares QQQ (NasdaqGM: 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.