Investors buying one or more index exchange-traded funds, or ETFs, for their portfolios will have several decisions to make and several factors to consider. The two most critical are, of course, the class of security — stocks, bonds, alternatives, etc. — and the particular index to invest in — the S&P 500, the Dow Jones Industrial Average, the Russell 1000, etc. But, another critical aspect of index ETF investing is a concept known as weighting.
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What Is Weight in Investing?
Weighting refers to the proportionate emphasis, or weight, an index puts on a security based on a certain characteristic. Securities can be weighted within a portfolio for many reasons. For instance, dividend yield, trading volume and price-to-earnings ratio, or value, can all be used to weight an index or an ETF.
Perhaps the most popular weighting is weighting by market capitalization. This method is called cap weight. Cap weight simply means that asset managers use the size of a company — its market cap — to determine the size of a position. The bigger the company, the bigger the allocation. Cap-weighted index ETFs can make a lot of sense, because bigger companies tend to be stronger companies that can use their size advantage to outperform competitors. But there’s a smart alternative to cap-weight ETFs. They are called equal-weight ETFs.
Why Buy Equal Weight ETFs?
Equal-weight ETFs, as opposed to their cap-weight counterparts, allocate a substantially equal amount of money to each security in a fund. The size of the company is not considered. If it’s a bond fund, every bond issue will receive the same allocation. If it’s a stock fund, the portfolio manager will invest the same dollar amount in every component stock.
Because no one can predict the exact timing of a stock’s outperformance or underperformance, equal weighting can be beneficial. Investors in equal-weight products get the same amount of exposure to every security and can enjoy more balanced returns regardless of what investment is doing best at any given time. In other words, equal-weight ETFs spread assets more evenly and are a somewhat more diversified method of index investing.
Here’s a list of seven of the best equal-weighted ETFs to buy now:
| Equal-Weight ETFs | Expense Ratio |
| Direxion Nasdaq-100 Equal Weighted Index Shares (ticker: QQQE) | 0.35% |
| SPDR S&P Oil & Gas Exploration & Production ETF (XOP) | 0.35% |
| Invesco Equal Weight 0-30 Year Treasury ETF (GOVI) | 0.15% |
| SPDR S&P Aerospace & Defense ETF (XAR) | 0.35% |
| iShares MSCI USA Equal Weighted ETF (EUSA) | 0.09% |
| Invesco S&P 500 Equal Weight ETF (RSP) | 0.20% |
| First Trust Dow 30 Equal Weight ETF (EDOW) | 0.50% |
Direxion Nasdaq-100 Equal Weighted Index Shares (QQQE)
Modern investing demands exposure to high-tech stocks. Technology has been the driving force behind the market’s incredible returns for two decades. That’s why Invesco QQQ Trust (QQQ) is one of the most popular ETFs in the world. That famous fund tracks the performance of the tech-heavy Nasdaq 100, which is a cap-weight index of the 100 largest non-financial companies trading on the Nasdaq.
Drexon’s QQQE is the perfect alternative for tech investors who want an equal-weighted fund. QQQE is a $1.2 billion ETF that mirrors the Nasdaq 100 Equal Weighted Index. It owns the same stocks as QQQ but allocates an equal amount of capital to each one rather than favoring larger companies.
Investing in tech for the long run is a smart move, but the dominance of large caps and mega caps may be coming to an end. That’s the investment rationale behind QQQE.
Expense ratio: 0.35%
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
XOP is an equal-weighted energy ETF that tracks the S&P Oil & Gas Exploration & Production Select Industry Index. The fund has over $3.5 billion in assets under management.
The fund is focused on the exploration and production areas of the hydrocarbon energy markets. In energy industry parlance, the exploration end of the business is called upstream and the production side is called downstream.
XOP is an equal-weighted ETF that provides a 2.3% dividend yield and has great potential for sustained capital appreciation over time.
Concerns over the environmental impact of burning fossil fuels are pushing developed countries away from oil and gas, but the transition to green energy sources is going to take decades to achieve. In the meantime, demand for traditional energy should remain very strong.
Expense ratio: 0.35%
Invesco Equal Weight 0-30 Year Treasury ETF (GOVI)
A well-balanced portfolio will include fixed-income securities as well as equities. GOVI is a $652 million government bond ETF that replicates the ICE 1-30 Year Laddered Maturity US Treasury Index.
The fund’s name goes a long way toward explaining how GOVI is managed. This bond fund invests in U.S. government securities ranging in remaining maturities from one up to 30 years. The equal weighting creates a laddering effect with bonds constantly coming due and the proceeds being constantly reinvested. Laddering of fixed-income investments reduces interest rate risk.
No one expects funds like GOVI to go up when rates are rising, but all indications are that rates are finished going up and are about to come down. In addition to the 12-month trailing yield of 3.5%, investors may see substantial capital appreciation from this fund if and when rates start to fall.
Expense ratio: 0.15%
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SPDR S&P Aerospace & Defense ETF (XAR)
In our geopolitically troubled world, defense stocks are a smart investment. XAR is a $2.1 billion sector-focused index fund that closely tracks the S&P Aerospace & Defense Select Industry Index. That index and the fund are substantially equal-weighted.
With war in Ukraine still raging and tensions in the Middle East showing no signs of easing, NATO nations and their enemies are increasing defense spending. Those unfortunate facts along with the United States’ deteriorating relationship with China make XAR a very timely investment.
Another reason savvy investors are allocating money to XAR and defense industry stocks is the fact that modern defense and aerospace companies are closely related to tech companies. Today’s aircraft and weapons systems are highly sophisticated. They are driven by high-speed computing and state-of-the-art artificial intelligence. Today a defense stock play is also a tech play.
Expense ratio: 0.35%
iShares MSCI USA Equal Weighted ETF (EUSA)
Investors looking for a low-cost way to gain widespread exposure to domestic large-cap and mid-cap stocks should consider EUSA. Owning this fund is an excellent way to buck the trend of favoring larger stocks and take a more diversified, more balanced approach to U.S. equities.
EUSA uses the MSCI USA Equal Weighted Index as its benchmark. The fund should deliver results that closely match that of the index after the exceedingly low expense ratio is accounted for. According to the fund’s marketing material, EUSA has the lowest expense ratio of any equal-weighted U.S. equity index fund.
The fund launched on May 5, 2010, and has delivered a total return based on net asset value of 11.3% since that date through June 30.
If you’re worried that you may have too much large-cap exposure or that your portfolio is too tech-heavy, EUSA may be the right fund for you.
Expense ratio: 0.09%
Invesco S&P 500 Equal Weight ETF (RSP)
Many experts say that a low-cost S&P 500 fund should be the core of any long-term equity portfolio. That’s because the S&P 500 is considered a good representation of the U.S. stock market as a whole.
RSP is a $54 billion ETF that tracks the S&P 500 Equal Weight Index, which, as you might expect, is simply an equal-weighted version of the S&P.
The fund provides broad diversification over 503 of the strongest U.S.-based companies, but it does so on an equal rather than a cap-weighted basis. Investors in RSP can expect the fund to reflect the health of the U.S. economy and the stock market, but it should be a little less volatile than a standard S&P 500 fund, and it may even outperform the S&P if small and midsize companies regain prominence.
Expense ratio: 0.2%
First Trust Dow 30 Equal Weight ETF (EDOW)
EDOW is a small ETF — it has just $228 million in assets — but it belongs on this list because of the prominence and long-term performance of its namesake benchmark, the Dow Jones Industrial Average. The Dow is, of course, one of the most famous equity indexes that exists, and EDOW invests in the stocks that make up the Dow.
More specifically, EDOW is based on the Dow Jones Industrial Average Equal-Weight Index, which is simply an equal-weight version of the Dow.
This fund is a good way to invest in the Dow on an equal-weighted basis, but investors should be aware that, when market appreciates steadily, this fund will have a relatively high degree of internal trading. That’s because the fund rebalances every three months to maintain its strict equal weighting.
Expense ratio: 0.5%
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7 Top-Performing Equal Weight ETFs to Buy Now originally appeared on usnews.com
Update 08/05/24: This story was previously published at an earlier date and has been updated with new information.
