Index ETFs are designed to mirror particular market indexes. The iShares Dow Jones US ETF (ticker: IYY), for instance, tracks the Dow Jones Industrial Average. The SPDR S&P 500 ETF (SPY), as another popular example, mimics the S&P 500. In practical terms, index ETF investors should realize the same returns that the index produces, minus fees and expenses.
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No investment is guaranteed, but because markets tend to appreciate over time, “indexing” using ETFs has proven to be a sound investment strategy.
Not all indexes, however, are created equal. Many are “cap-weighted,” meaning allocations are made based on the market capitalization — or total value of outstanding stock — of companies in the index. The result is that mega-cap companies like Apple Inc. (AAPL) and Microsoft Corp. (MSFT) tend to be overrepresented in major indexes.
In cap-weighted scenarios, when smaller companies outperform their larger counterparts, investors will inevitably miss out on some of those gains. Index attribution research can tell us which stocks contributed most to the past performance of an index, but the best minds on Wall Street still haven’t figured out how to predict which stocks will lead the way in the future.
In answer to that problem, index sponsors developed “equal-weight” versions of some of their most popular indexes. Wall Street, in turn, has created more than 118 equal-weight ETFs from which to choose.
Equal-weight indexes and the ETFs that correspond with them cover many popular and important segments of the economy, from tech to biotech to industrials and more.
Equal-weight investments distribute capital equally among securities in a portfolio. Subsequently, a comparatively small company such as Mohawk Industries Inc. (MHK) can have the same relative impact as a giant company like Amazon.com Inc. (AMZN). Because equal weighting spreads risk evenly, many investors find equal-weight ETF investing compelling.
If you agree or are looking for a place to start your own research, here are seven of the best equal-weight ETFs to consider buying right now:
| ETF | Expense ratio |
| Invesco S&P 500 Equal Weight ETF (RSP) | 0.20% |
| Direxion Nasdaq-100 Equal Weighted ETF (QQQE) | 0.35% |
| SPDR S&P Oil & Gas Exploration & Production ETF (XOP) | 0.35% |
| Innovator S&P Investment Grade Preferred ETF (EPRF) | 0.47% |
| Invesco Equal Weight 0-30 Years Treasury ETF (GOVI) | 0.15% |
| SPDR S&P Metals & Mining ETF (XME) | 0.35% |
| SPDR S&P Aerospace & Defense ETF (XAR) | 0.35% |
Invesco S&P 500 Equal Weight ETF (RSP)
The S&P 500 is a fairly broad representation of the U.S. stock market, as virtually all industrial sectors are present in the index. RSP corresponds to the S&P 500 Equal Weight Index which, as the name implies, is an equally weighted version of the more famous S&P 500, which has large-cap bias.
Investors in RSP are diversified among stocks of 503 leading U.S. companies, but on an equal-weight basis. RSP makes an excellent core holding because it will generally reflect the performance of the U.S. economy and the U.S. stock market as a whole.
Recently, the cap-weighted S&P 500 has enjoyed a disproportionate advantage over the equal-weight version, but over long periods, that advantage is far less pronounced. In fact, RSP has outperformed the S&P 500, with a return of 10.2% since the fund’s inception on April 14, 2003.
Expense ratio: 0.20%
Direxion Nasdaq-100 Equal Weighted ETF (QQQE)
A position in the Nasdaq-100 index is considered a must for long-term investors who can accept the volatility that comes with investing in a tech-heavy fund. QQQE provides that exposure by tracking the performance of the Nasdaq-100 Equal Weighted ETF.
Invesco QQQ Trust (QQQ), which follows the Nasdaq-100 index, needs no introduction among ETF investors. It ranks as one of the most popular ETFs in the world. Direxion’s QQQE is an excellent alternative for investors who appreciate QQQ but prefer equal weighting.
The rationale for considering QQQE right now is simple: While it’s smart to invest in the tech sector, the dominance of large-cap tech names — notably Nvidia Corp. (NVDA) — over smaller stocks is not likely to last forever. With that in mind, an equal-weight approach makes a good deal of sense.
Expense ratio: 0.35%
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
The S&P Oil & Gas Exploration & Production Select Industry Index is an equally weighted index that reflects the “upstream” (exploration) and “downstream” (production) segments of energy markets. XOP is an ETF based on that index. The fund merits consideration for three reasons: performance, income and potential.
This energy ETF has produced a remarkable 56.4% return over the last three years and a healthy distribution yield of 2.4% as of Nov. 27.
Looking forward, the demand for traditional energy sources, such as oil and natural gas, is expected to remain strong for some time, even as the world makes a concerted effort to transition to renewables.
Another factor that makes XOP compelling is the fact that developed nations are supporting the market by actively buying back hundreds of millions of barrels of oil they previously released from strategic petroleum reserves to combat inflation.
Expense ratio: 0.35%
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Innovator S&P Investment Grade Preferred ETF (EPRF)
The universe of preferred stock funds is small, but it shouldn’t be overlooked. EPRF is an ETF based on the S&P US High Quality Preferred Stock Index, which only includes investment-grade (rated BBB- or better by S&P) issues.
Preferred stocks are unique income securities. They pay a relatively high dividend and trade like regular stocks, but they don’t confer equity ownership or voting rights on shareholders.
The case for EPRF in today’s environment is founded on current interest rates. The general level of interest rates has been increasing for 21 months. When rates go up, income investments, like EPRF, tend to go down. That accounts for its rather dismal performance over the last few years. But there’s good news to go along with the bad. The yield of EPRF was rising while the market price was falling. The fund boasts a very attractive 30-day SEC yield of 6.1%.
Further, what goes up must come down. Most investors shouldn’t speculate on the timing of interest rate moves, but it’s reasonable to assume that we are closer to the top of the rate cycle than the bottom. We may soon find ourselves in a period of falling rates. If and when that happens, EPRF should reward investors with substantial capital appreciation.
Expense ratio: 0.47%
Invesco Equal Weight 0-30 Years Treasury ETF (GOVI)
Our next entrant to our list is another fixed-income product for the same reasons. GOVI is a government bond ETF based on the ICE 1-30 Year Laddered Maturity US Treasury Index.
The fund invests in U.S. government securities that range from very short-term bills up to 30-year bonds. There is an equal emphasis on each maturity, creating a “ladder” effect of maturing bonds.
Like most bond funds, GOVI depreciated over the last two years as interest rates were rising. But, U.S. Treasury yields may be peaking and GOVI should appreciate significantly when rates start to fall. Other positives are the fund’s low expense ratio and its high current income. GOVI has a 30-day SEC yield of 5%.
Expense ratio: 0.15%
SPDR S&P Metals & Mining ETF (XME)
XME is a unique natural resources ETF that attempts to replicate the S&P Metals & Mining Select Industries Index.
The fund invests in a wide variety of metals and mining operations that include aluminum, copper, precious metals (gold, silver and platinum) and steel.
An investment in XME is a play on the unprecedented and rapidly growing demand for precious and industrial metals.
Gold and silver have always been sought after as a dependable store of value. That’s even more true in today’s turbulent and uncertain times. Demand for industrial metals is higher than ever due to the incredible and never-ending needs of the high-tech automotive, medical and biotech industries. And that’s not including the incredible demand from worldwide jewelry markets, which are booming with global economic growth.
Expense ratio: 0.35%
SPDR S&P Aerospace & Defense ETF (XAR)
XAR is a sector-specific ETF that gives investors targeted access to companies in the defense and aerospace industries. The $1.6 billion, equally weighted fund is based on the S&P Aerospace & Defense Select Industry Index.
Geopolitical tensions around the world are high and only seem to be getting higher. The war in Ukraine — already more than two years long — has prompted NATO countries to dramatically increase defense spending. Israel is waging war on Hamas in Gaza, and U.S. relations with China are strained. All of this is to say that now may be a very opportune time to allocate capital to defense stocks.
Also, consider the fact that defense contractors have evolved into high-tech companies as weapons and military systems have become more sophisticated. Further, the aerospace firms in XAR will benefit from the fast-growing satellite communications and commercial space exploration industries.
Expense ratio: 0.35%
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7 Best Equal-Weight ETFs to Buy Right Now originally appeared on usnews.com
Update 11/27/23: This story was previously published at an earlier date and has been updated with new information.
