Investors researching index exchange-traded funds (ETFs) will find that most of them are capitalization-weighted, or cap-weighted for short. There are solid reasons why indexes and index fund managers are biased toward cap-weightings, but equal-weight ETFs can be very compelling. Equal-weight ETFs provide investors with an extra measure of diversification by spreading fund assets evenly. For more conservative equity investors looking for market returns with less volatility than cap-weighted alternatives, equal-weight ETFs can be an excellent, low-cost choice.
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What Is the Difference Between Cap-Weighted and Equal-Weighted?
The difference between cap-weighted products and their equal-weighted counterparts comes down to how they allocate their assets under management (AUM).
Cap-weighted investments buy and hold securities based on the overall size, or capitalization, of the companies they’re investing in. Bigger companies receive bigger investment allocations. The result is that movements of bigger companies — up and down — have a bigger impact on overall performance.
Equal-weighted investments, on the other hand, allocate the same amount of money to each security in a portfolio. The size of a company is not a factor in asset allocation. In equal-weighted products, every stock in a fund will have the same relative impact on the fund’s returns.
What Are the Benefits of Equal-Weight ETFs?
For many investors, the benefit of equal-weight ETFs is that they enjoy equal exposure to every stock in a portfolio. Equal-weight ETFs have the ability to make more money during periods when small and mid-caps
are outperforming large caps. They represent a more diversified way to participate in equity markets.
That being said, it’s important to remember that you can’t predict performance, and market conditions can change rapidly.
Equal-weight ETFs are a little less traditional, but they offer investors a more balanced approach to equity investing. They are best for investors who believe in the potential of smaller firms over larger ones and are looking for sustained growth over time.
Here are seven of the best equal-weight ETFs to consider buying:
| ETF | Expense Ratio |
| Invesco S&P 500 Equal Weight ETF (ticker: RSP) | 0.20% |
| SPDR S&P Metals and Mining ETF (XME) | 0.35% |
| iShares Morningstar Mid-Cap ETF (IMCB) | 0.04% |
| SPDR S&P Biotech ETF (XBI) | 0.35% |
| Invesco Russell 1000 Equal Weight ETF (EQAL) | 0.20% |
| First Trust Dow 30 Equal Weight ETF (EDOW) | 0.50% |
| SPDR NYSE Technology ETF (XNTK) | 0.35% |
Invesco S&P 500 Equal Weight ETF (RSP)
RSP is a $54 billion ETF that’s designed for investors who want to be invested in S&P 500 stocks but are worried about being too concentrated in the biggest large-cap names and want to earn higher returns when smaller companies outperform.
RSP is an index ETF that mirrors the S&P 500 Equal Weight Index. The fund’s expense ratio is very reasonable, which means it should come very close to duplicating the performance of the underlying index.
As expected, RSP holds all of the stocks in the S&P 500, but this fund avoids excessive concentration risk. For example, the largest 10 stocks in the S&P 500 represent more than 30% of that index, which can be considered significant overconcentration. RSP, on the other hand, is equally weighted and can never experience overconcentration.
Expense ratio: 0.20%, or $20 annually per $10,000 invested
SPDR S&P Metals and Mining ETF (XME)
With the U.S. and world economies booming, the demand for industrial metals has never been higher. The S&P Metals & Mining Select Industry Index tracks the overall performance of firms that are directly involved in the exploration, mining and production of non-precious metals used in industry and manufacturing. XME is a low-cost, $2 billion index ETF that tracks the performance of that index.
Don’t buy XME if you’re looking for exposure to gold and silver. This fund concentrates on industrial metals like aluminum, iron, steel and copper. These metals are essential to many industries such as construction, automotive, tech, manufacturing and even the medical device segment. Industrial metals are basic raw materials that fuel global growth.
Despite persistent inflation, the U.S. and other developed nations are doing quite well economically. This makes XME a very timely investment. Keep in mind, however, that economies run in cycles. If and when we experience a downturn, it will be reflected in the demand for industrial metals and the price of XME.
Expense ratio: 0.35%
iShares Morningstar Mid-Cap ETF (IMCB)
Mid-cap stocks represent a sweet spot between large-cap and small-cap stocks. More specifically, mid-cap companies are those with market capitalizations of between $2 billion and $10 billion.
Like their large-cap counterparts, mid-caps are stable and established companies, but they are often more agile and have more room to grow than bigger firms. Performance tends to be cyclical, but there are many historical periods when mid-caps outperformed both large-cap and small-cap stocks — especially during times of economic recovery or prolonged economic growth.
IMCB is a low-cost, $825 million index ETF designed to track the Morningstar U.S. Mid Cap Index, which is a benchmark that reflects the performance of the domestic mid-cap equity market. The index was designed by Morningstar, a leading independent research and data firm.
Expense ratio: 0.04%
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SPDR S&P Biotech ETF (XBI)
Biotechnology stocks are at the leading edge in developing new drugs, medical devices and treatment therapies for debilitating diseases and devastating medical conditions. This fact became obvious during the world’s response to the COVID-19 pandemic. Breakthrough advances in areas such as gene therapy, pharmaceuticals, immunotherapy and targeted precision medicine can revolutionize health care, save lives and make investors money.
XBI is an index ETF in the SPDR family of funds managed by State Street Global Advisors. This $6 billion ETF is designed to track the performance of the S&P Biotech Select Industry Index after subtracting the fund’s reasonable expense ratio.
The S&P Biotech Select Industry Index is a subset of the much larger S&P Total Market Index. As its name implies, the S&P Total Market Index is a very broad index that corresponds with the entire U.S. equity market. The S&P Biotech Select Industry Index and XBI have a more focused approach. They represent just the biotech segment, or subindustry, of the market.
This fund is appropriate for investors specifically looking to make a tactical allocation to the potentially profitable but aggressive biotech sector.
Expense ratio: 0.35%
Invesco Russell 1000 Equal Weight ETF (EQAL)
The Russell 1000 Index is one of the most well-known stock market indexes in the world. It comprises the 1,000 largest publicly traded stocks based on market capitalization. It is considered a good representation of the broad market, but it is cap-weighted rather than equal-weighted.
There is, however, an equal-weight version of the Russell 1000 that is appropriately named the Russell 1000 Equal Weight Index. EQAL is a $580 million ETF designed to mirror the equal-weight version of the Russell 1000.
EQAL is very broadly diversified. In fact, all 11 stock market sectors are represented by the fund’s holdings. For this reason, EQAL makes an excellent core holding for investors who take an equal-weight approach to portfolio construction.
The fund has a trailing-12-month dividend yield of 1.9%.
Expense ratio: 0.20%
First Trust Dow 30 Equal Weight ETF (EDOW)
EDOW is a relatively small ETF — only $227 million in AUM — that mirrors an equal-weight version of the Dow Jones Industrial Average, one of the oldest and most famous stock market benchmarks on earth.
The name of the index EDOW follows is exactly what you’d expect. It’s called the Dow Jones Industrial Average Equal Weight Index. EDOW seeks to replicate the performance of that equally weighted index after fees and expenses are accounted for.
To keep a strict equal-weight allocation, EDOW is rebalanced every quarter. This results in more frequent trading than in some other index funds. That, in part, accounts for the fund’s relatively high expense ratio when compared to other funds on this list.
EDOW is not intended to be a dividend vehicle, but the fund’s 1.9% trailing yield will be appreciated by income-oriented investors.
Expense ratio: 0.50%
SPDR NYSE Technology ETF (XNTK)
XNTK is a very narrowly focused $743 million ETF that invests in a volatile sector of our economy. The fund has the potential for excellent long-term performance, but should be considered an aggressive investment that may not be suitable for conservative investors.
XNTK tracks the NYSE Technology Index. Right now, in sympathy with the index, XNTK has only 35 holdings in its portfolio. The fund holds tech stocks like Nvidia Corp. (NVDA), Broadcom Inc. (AVGO) and Micron Technology Inc. (MU) but on an equal-weight, rather than a cap-weight, basis.
As one might expect, the performance of XNTK has been excellent. State Street Global Advisors, the fund’s sponsor, reports a five-year annualized total return based on NAV of 18.46%. If the tech sector continues on its current pace, investors should continue to see solid performance from XNTK.
Expense ratio: 0.35%
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7 Top-Performing Equal-Weight ETFs to Buy originally appeared on usnews.com
Update 05/13/24: This story was previously published at an earlier date and has been updated with new information.
