What Is An Equal-Weight ETF?

We love discussing ETFs with you. 

Why? 

Because they’re a great way to invest in the stock market, but also because we use them as a tool to help demystify investing. We learn a lot about how investing works by viewing the space through ETFs. 

ETFs make investing (relatively) easy. 

Regularly contribute a few dollars to the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ) and you’ve likely done more than the investor sitting next to you. Sure, you might be able to earn an extra dollar today in whatever’s hot, but, over the long haul, it’s tough to argue against a SPY/QQQ-focused investment approach. 

Next week, The Juice details the danger of chasing what’s hot via thematic ETFs. Preview: It’s almost as bad as buying the top of meme name or penny stock pump and dump. 

But, today, we focus on another viable long-term strategy. 

Investing in equal-weight ETFs in addition to or rather than SPY and QQQ. 

As we note in our SPY and QQQ lovefests, these two ETFs overexpose you to companies with huge market caps. For example, the top ten holdings in SPY make up 32% of the entire ETF, led by Microsoft (MSFT) at 7.4% and Apple (AAPL) at 7.3%, as of November 28, 2023. It’s even more lopsided in the tech-heavy QQQ where the top ten stocks comprise nearly 50% of the fund. The top five alone — Apple, Microsoft, Amazon.com (AMZN), Nvidia (NVDA) and Meta Platforms (META) — account for 35.5% of QQQ’s composition, as of the other day. 

This is great when tech leads the way. As it has been for so long. However, other spaces have also been on formidable runs. Like the homebuilders The Juice suggested buying way back in April 2022. 

Whatever. 

Bottom line is you might be uncomfortable being overexposed. With putting all or too many of your eggs in one basket. It’s a stretch to say you’re truly diversified in SPY and QQQ given the aforementioned concentrations, even if these funds rebalance from time to time. 

So, enter equal-weight ETFs.

As the name implies, equal-weight ETFs hold the stocks of whatever index they track in equal proportion. Not based on market cap. So, in SPY, for example, names at the bottom of the list, such as Alaska Air Group (ALK), Hasbro (HAS) and Boston Properties (BXP) have as much of a relative impact on performance as Apple or Microsoft. 

To illustrate, let’s look at the equal-weight ETF investors search for most in Trackstar, our proprietary sentiment indicator — Invesco S&P 500 Equal Weight ETF (RSP). 

Invesco markets RSP by pointing out the overconcentration: 

• Today, the total weight of the top ten names in SPY is 32%. 
• In 2017, it was just 21%. 
• In SPY, the 100 largest companies make up 71% of the index. The 100 smallest just 3%. 
• In RSP, every 100 companies comprise an even 20% of the portfolio. 

And, obviously the stocks have equal weighting in RSP. 

As for performance, SPY is up roughly 19.5% YTD and 65% over the last five years. RSP is up just 4.3% so far this year, but 44.8% over the last five. 

If you max it out to RSP’s inception in April, 2003, the ETF has returned 467% versus a 422% for SPY over the same period. These numbers do not include dividend payments. 

Sort of what you’d expect. 

So, there’s not a huge difference. The key might just be your comfort level if you don’t want to be so tech and biggest company heavy. 

The most searched equal-weight Nasdaq 100 ETF in Trackstar is the Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE). This ETF came to be in March 2012. 

Same idea as the SPY to RSP comparison. In QQQE, each stock makes up 1% of the portfolio. So you “own” as much Apple as you do Sirius XM (SIRI) and Dollar Tree (DLTR). 

In terms of performance: 

QQQ wins hands down. No matter the time period. 

One thing to note: There’s a different mindset when you buy QQQ relative to SPY. With SPY, you’re going broad on the U.S. economy. It just so happens that tech is the driver. With QQQ, you go in expecting to be tech heavy because QQQ tracks a tech-heavy index of about one-fifth the number of stocks in the more wide-ranging S&P 500. 

In terms of expense ratios (if you don’t know what an expense ratio is, click here), these equal-weight ETFs are a bit more expensive, relative to SPY and QQQ. 

• SPY’s expense ratio is 0.09%. RSP’s is 0.20%.
• QQQ’s expense ratio is 0.20%. QQQE’s is 0.35%. 

The Bottom Line: Just some food for thought. Depending on your investor psychology, equal-weight ETFs might not be a bad option, in place or, maybe more likely, as a supplement to SPY and QQQ. 

As you’d expect in an ETF world chock full of choices, these equal-weight products don’t stop at the two major broad market indexes. In future installments of The Juice, we’ll look at other equal-weight ETFs and compare their performance.

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