The equal-weight methodology is one of the oldest iterations of smart beta and one that is applied to scores of broad market and sector exchange traded funds. Some of those ETFs highlight the durability of equal weighting, including the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW).
QQEW is one of the equal-weight answers to the popular PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index. QQEW, which hit a record high Wednesday, allocates about 34% of its weight to technology stocks while QQQ devotes more than half its weight to the technology sector.
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. We are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends.
The sector could even see more free cash on hand if Congress proceeds with plans to cut down capital gains on repatriated earnings or follow in President-elect Donald Trump’s proposed repatriation tax holiday policy that would encourage large multi-national companies to bring back hundreds of billions of dollars in cash to the U.S. for possible use in dividends, deals or other projects. Trump plans to levy a 10% repatriation tax on U.S. companies’ overseas profits from foreign subsidiaries, compared to the current 35% tax rate.
Impressive earnings reports have recently helped lift the technology sector and ETFs such as XLK. Historically, after a profit falloff, the technology sector has been among the best areas in a rebound. Another catalyst is the tech sector’s status as a cyclical sector. Cyclical groups historically perform well as interest rates rise.
A disadvantage of equal-weight indexes and ETFs is that when large- and mega-cap names, such as Amazon, Apple, Microsoft, Facebook and Google parent Alphabet, perform well as they are doing this year, the equal-weight strategy can lag cap-weighted equivalents. For example, QQEW is trailing QQQ by 70 basis points this year.
None of QQEW’s holdings account for more than 1.2% of the ETF’s weight and the fund’s combined exposure to Amazon, Apple and Facebook is barely more than 3%.
Home to nearly $473 million in assets under management, QQEW holds 107 stocks and tracks the NASDAQ-100 Equal Weighted Index. The ETF turns 11 years old later this month.
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