Some benefits of equal-weight ETFs.
Equal-weighted exchange-traded funds can often perform better than their market-weighted counterparts because there is less concentration on a small group of stocks. That means investors won’t be exposed to steep declines as they would with funds in which a few large and popular companies represent a big part of the portfolio. “Diversification is important, especially in a volatile market,” says Alex Chalekian, CEO of Lake Avenue Financial, and equal-weight ETFs are always more diversified than other ETFs that offer uneven exposure to a sector or strategy. If this diversified approach appeals to you, here are seven top-performing equal-weight ETFs to consider.
Invesco S&P 500 Equal Weight ETF (ticker: RSP)
Risk-averse investors can look to RSP, which targets even allocation in each of the 500 stocks in the widely followed S&P 500. It’s also quite affordable with an annual expense ratio of 0.2%, or $20 on every $10,000 invested. “You get the added benefit of even more diversification by avoiding heavy concentration in any one area of the market,” says Mike Loewengart, chief investment officer at E-Trade Financial. Chalekian notes that the more diversified approach of this fund helps it avoid the volatility that can affect its peers that are benchmarked to a market-weighted S&P index. From April 2000 through March 2002, the S&P 500 experienced a 21.5% loss during the tech bubble, while in the same time frame, an equally-weighted portfolio returned a 25.3% gain.
First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW)
The S&P 500 can be a bit top-heavy based on market weighting, but the Nasdaq-100 is even worse with a massive 14% of the portfolio in Apple (AAPL) and another 11% or so in both Microsoft (MSFT) and Amazon.com (AMZN). That means more than a third of this portfolio’s assets are in those three picks alone. That may be appealing if you want to go all-in on Big Tech, but Mike Molitoris, CEO of Flagship Wealth Management Group in Cary, North Carolina, notes that this may not be the goal of many investors. An equal-weight approach to the Nasdaq “negates the opportunity for a sector or capitalization from adversely impacting the index and the fund,” he says. The fund comes with an expense ratio of 0.59%.
SPDR S&P Bank ETF (KBE)
The roughly $1 billion SPDR S&P Bank ETF allows investors to use an equal-weight fund to spread their investment evenly around the financial sector and avoid reliance on the larger names on Wall Street — like financial icon JPMorgan Chase & Co. (JPM), which is currently valued at more than $300 billion. That’s worth more than Wells Fargo (WFC), Citigroup (C) and PNC Financial Services (PNC) combined. KBE targets allocations of less than 2% in each of its 86 components; however, it makes sure that even the smaller, regional banks have just as much of an effect on this fund as big banks — reducing volatility and adding diversification. KBE has a current expense ratio of 0.35%.
SPDR S&P Biotech ETF (XBI)
The SPDR S&P Biotech ETF fund tracks the S&P Biotechnology Select Industry Index, an equal-weighted index that holds large-, mid- and small-cap stocks within the biotech sector. The fund has an expense ratio of 0.35%. In addition to being an affordable and equal-weight sector bet, XBI also offers stability based on its more than $5.2 billion in assets under management and average daily volume north of 5 million shares traded. “Besides expense ratios, liquidity is very important,” Chalekian says. “You need to make sure that you don’t get into a fund or ETF (with) very little volume. This way you don’t get a bad price when you’re trying to execute a trade.”
ETFMG Prime Cyber Security ETF (HACK)
“Equal-weighted indexes benefits include the higher growth potential of small-cap and mid-cap stocks because of a larger investment in these higher return firms,” says Stuart Michelson, a finance professor at Stetson University. On the flip side, one drawback to equal-weighted indexes is the higher risk of investing in small-cap firms that can be more volatile instead of focusing on larger stocks in a market-weighted ETF, he says. One equal-weight fund that exemplifies this is the ETFMG Prime Cyber Security ETF, which avoids reliance on entrenched Big Tech names like Cisco Systems (CSCO). Cisco is included, of course, but none of HACK’s holdings account for more than 4% of the total portfolio — so almost 60 other cyber-focused stocks get an equal seat at the table. With a net expense ratio of 0.6%, HACK is a lower-cost fund to consider.
SPDR S&P Aerospace & Defense ETF (XAR)
Tech isn’t the only sector that sometimes populates related ETFs with a short list of titanic stocks. The SPDR S&P Aerospace & Defense ETF tracks the S&P Aerospace & Defense Select Industry Index, but it makes sure that the typical behemoths in the space — like the nearly $100 billion Boeing Co. (BA) — aren’t overshadowing smaller stocks, such as the $4 billion aerospace firm Mercury Systems (MRCY), that also make up the fund’s list of components. Some stocks do pop. Take Maxar Technologies (MAXR), for example, which is up around 60% year to date in 2020 as of mid-August. But you can expect this ETF to rebalance to ensure MAXR stock hasn’t grown to be too large a player in this portfolio, which will smooth out volatility in the long run. XAR’s expense ratio is 0.35%.
ROBO Global Robotics and Automation Index ETF (ROBO)
Another area where investors may be eager to make sure small up-and-coming stocks are represented in their portfolio is robotics and automation technology. The ROBO Global Robotics and Automation Index ETF manages more than $1 billion in assets and consists of almost 90 stocks in the robotics, automation and artificial intelligence industries. You’ll recognize some big names such as Nvidia Corp. (NVDA), but there are plenty of other smaller companies like the $11 billion Japanese robotics firm Daifuku Co. (DFKCY), which are targeted with the same weighting of about 2% or so. This fund comes with a higher expense ratio of 0.95%.
Top equal-weight ETFs for your portfolio:
— Invesco S&P 500 Equal Weight ETF (RSP)
— First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW)
— SPDR S&P Bank ETF (KBE)
— SPDR S&P Biotech ETF (XBI)
— ETFMG Prime Cyber Security ETF (HACK)
— SPDR S&P Aerospace & Defense ETF (XAR)
— ROBO Global Robotics and Automation Index ETF (ROBO)
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Update 08/19/20: This article was published on a previous date and has been updated with new information.