The weighting of holdings is an important consideration in the construction of a market index or other financial portfolio. In the context of exchange-traded funds, or ETFs, weighting refers to the prominence a particular security is given in a particular ETF.
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Cap-weighted ETFs make allocation decisions based on the market capitalization of the security. In other words, the bigger the company, the more they invest in it. Subsequently, position sizes are proportionate to market capitalization in cap-weighted ETFs.
Conversely, equal-weight ETFs purposefully ignore market cap when it comes to position sizing. An equal-weight ETF will own roughly the same dollar amount of big companies as smaller companies. Equal-weight ETFs are more diversified because investor assets are less concentrated in the stocks or bonds of larger companies.
Bigger companies often outperform their smaller counterparts, but this is not always the case. Equal-weight ETFs are based on the premise that investors can’t predict when particular market segments will outperform, so it makes sense to invest on an equal-weight basis.
Here are seven of the best high quality equal-weight ETFs to buy now:
| ETF | Expense Ratio |
| First Trust Dow 30 Equal Weight ETF (ticker: EDOW) | 0.50% |
| SPDR S&P Biotech ETF (XBI) | 0.35% |
| Invesco Russell 1000 Equal Weight ETF (EQAL) | 0.20% |
| SPDR S&P Regional Bank ETF (KRE) | 0.35% |
| Invesco S&P 500 Equal Weight Health Care ETF (RSPH) | 0.40% |
| SPDR S&P Homebuilders ETF (XHB) | 0.35% |
| SPDR NYSE Technology ETF (XNTK) | 0.35% |
First Trust Dow 30 Equal Weight ETF (EDOW)
The Dow Jones Industrial Average, or DJIA, is one of the oldest and most recognized measures of the stock market in the world. Created in 1896 by Charles Dow, the DJIA is made up of 30 large-cap, publicly traded stocks that are seen as representing the core of the U.S. stock market.
EDOW is a $243 million ETF based on an equal-weight version of the famous DJIA. EDOW mirrors the Dow Jones Industrial Average Equal Weight Index and will generally replicate the performance of that index less fees and expenses.
Because maintaining a strict equal-weight focus is important to the fund, EDOW is rebalanced quarterly. The 30 companies in the index are considered blue-chip stocks and have demonstrated sustained growth over time. EDOW has appreciated more than 45% over the last five years and has a current distribution yield of 1.9%.
Expense ratio: 0.50%
SPDR S&P Biotech ETF (XBI)
XBI is an equal-weight ETF based on the S&P Biotechnology Select Industry Index. That index represents the biotech portion of the larger S&P Total Market Index. This $6.6 billion ETF allows investors to zero in on the potentially lucrative biotech industry.
XBI is diversified among small-, mid- and large-cap stocks and is appropriate for aggressive ETF investors who want to make a strategic, tactical allocation to the sector. Cytokinetics Inc. (CYTK) and Karuna Therapeutics Inc. (KRTX) are examples of the kind of stocks XBI holds.
Past performance can’t be counted on as an indicator of future performance, but the fund’s 10-year annualized total return of 7.8% through the end of 2023 is worth noting.
Expense ratio: 0.35%
Invesco Russell 1000 Equal Weight ETF (EQAL)
The Russell 1000 is a prominent stock market index that comprises the 1,000 largest publicly traded companies in the U.S as judged by market cap. The Russell 1000 is a cap-weighted index.
The Russell 1000 Equal Weight Index is — as its name suggests — an equal-weighted variation of the original. EQAL is an index fund that mirrors the equal-weight rather than the cap-weighted version.
EQAL is a popular ETF with $575 million in assets. Because of its broad diversification across all 11 stock market sectors, EQAL can be thought of as a core equity ETF holding.
Income is not a primary objective for EQAL, but current shareholders enjoy a dividend yield of 1.9%. The fund only rebalances once a year on the last Friday of every June. This keeps trading costs to a minimum and, in part, accounts for the low expense ratio.
Expense ratio: 0.20%
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SPDR S&P Regional Bank ETF (KRE)
Regional banks are an important component of the retail banking sector and the overall U.S. economy. Because they operate in specific, limited geographic areas they encourage competition. Because they serve local communities and businesses, they can sometimes make more informed and more appropriate lending decisions compared to their national and commercial counterparts.
KRE is an equal-weight ETF that focuses on regional banking. The fund is based on the S&P Regional Banks Select Industry Index, which itself represents the regional banks segment of the S&P Total Market Index. This is an excellent ETF for investors looking to strategically target regional banks.
KRE has more than $3 billion in assets under management invested in 140 separate holdings. The fund distributes dividends quarterly and has a current yield of 3.2%.
Expense ratio: 0.35%
Invesco S&P 500 Equal Weight Health Care ETF (RSPH)
RSPH is a straightforward ETF based on the S&P 500 Equal Weight Health Care Index. The index is made up of equal weightings of all 65 stocks in the health care sector of the S&P 500.
The global health care market is growing fast. One big reason is a worldwide demographic shift toward an older population. Because older people consume more health care services, the growth opportunities for health care companies — like the ones in RSPH — are significant.
Governments in developed nations are very supportive of the health care industry. They offer large incentives to consumers and companies to improve the health of their citizens. This bodes well for the kinds of stocks RSPH owns.
RSPH is a $980 million ETF with a current dividend yield of 0.7%.
Expense ratio: 0.40%
SPDR S&P Homebuilders ETF (XHB)
Building houses for residential clients is a highly competitive business. As in any industry, there are ups and downs, but success can bring great rewards. XHB is an ETF with $1.6 billion in assets. The fund follows the S&P Homebuilders Select Industry Index and has an objective of duplicating the performance of the fund minus fees and expenses.
Investors should keep in mind that this is a narrowly focused ETF. It invests in the entire homebuilder’s segment of the S&P Total Market Index, but right now that amounts to just 35 stocks.
The investment rationale for XHB is founded on the ongoing residential housing shortage in the U.S., where demand for single-family homes still outpaces supply. Companies like Toll Brothers Inc. (TOL) — one of the stocks in XHB — are doing all they can to address the shortfall, but experts predict that it will persist for the foreseeable future. That might be bad news for homebuyers, but it’s good news for XHB shareholders.
Expense ratio: 0.35%
SPDR NYSE Technology ETF (XNTK)
XNTK is an index fund that tracks the NYSE Technology Index. The index is made up of 35 leading tech stocks that trade on the New York Stock Exchange, or NYSE.
According to the fund’s fact sheet, XNTK had a remarkable five-year annualized total return of more than 20% through the end of 2023. That’s excellent performance, but it’s not altogether surprising given the incredible growth of the tech and communications sectors over that time period.
XNTK is a narrowly focused, $720 million ETF with less than 40 holdings. Because of the reduced diversification as compared to other tech-heavy ETFs like Invesco QQQ Trust (QQQ), investors can expect to endure more volatility in exchange for the potential for greater gains over the long term.
Expense ratio: 0.35%
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7 Best Equal-Weight ETFs to Buy Today originally appeared on usnews.com
Update 02/08/24: This story was previously published at an earlier date and has been updated with new information.
