Considering how ugly the broader market is today, the fact
that Apple (Nasdaq:
AAPL
) is down just 1% with 30 minutes in the trading day isn't too
shabby. One day and a 1% decline does not represent a break in
what has become one of the most impressive single-stock bull
trends in recent memory. That's a good thing because so many
investors have not only been drawn to Apple shares, but to
various ETFs
as proxies for the stock
.
Rather than incurring the potential downside risks of an ETF
that features a large weight to Apple such as the PowerShares QQQ
(Nasdaq:
QQQ
), Technology Select Sector SPDR (NYSE:
XLK
) or the iShares Dow Jones US Technology Index Fund (NYSE:
IYW
), the ETF with the largest allocation to Apple, the evidence is
compelling regarding equal-weight ETFs with only modest weights
to the iPhone maker.
After highlighting the risks posed to investors by
ETFs with excessive Apple allocations
Street One Financial President Scott Freeze talked with Benzinga
today and continued to extol the virtues of equal-weight ETFs
over those funds that bulging at the seams with Apple.
Freeze favors the First Trust NASDAQ-100 Equal Weighted Index
Fund (Nasdaq:
QQEW
). Apple accounts for just 1.02% of QQEW's weight and isn't even
among the ETF's top-30 holdings, but even with a significantly
lower weight to Apple than QQQ or XLK QQEW "is actually
performing better on the upside than one would expect and the
downside risk isn't as high," Freeze said in the interview.
One potential risk to those that are long ETFs such as QQQ and
XLK is the possibility of major indexes such as the Nasdaq 100
rebalancing, which it did last year, to lower Apple's weight.
Freeze notes a snowball effect could take place.
"When an index is reweighted, there are sell orders from every
ETF and mutual fund that hold Apple," Freeze said. "There could
be 10 million Apple shares for market-on-close orders when the
stock is trading at $620 and that could lead to Apple closing at
$595. It's hard to find the offsetting order flow for 10
million-share orders." (Note this is a hypothetical example.)
Of course, that would create selling pressure in ETFs, but
sizable orders to sell Apple would impact the likes of QQQ and
XLK more than QQEW, according to Freeze.
Year-to-date, QQEW has trailed QQQ by less than 5% and XLK by
less than 3%. The First Trust NASDAQ-100-Tech Index Fund (Nasdaq:
QTEC
), which isn't an equal-weight ETF, is up over 16% year-to-date
despite an allocation of just 2.42% to Apple.
In other words, investors aren't giving much away in terms of
performance to lower their exposure to Apple-specific risks. As
Freeze said "Investors buy ETFs to avoid single-stock risk. Apple
as one-fifth of an ETF defeats the purpose."
Freeze also mentioned the newly minted Direxion Nasdaq 100
Equal Weighted Index Shares ETF (NYSE: QQQE) as possible option
for investors looking for an equal-weight approach to the Nasdaq
100. QQQE debuted in late March.
Another option to consider is the Guggenheim S&P Equal
Weight Technology ETF (NYSE:
RYT
). Apple is RYT's second-largest holding at1.59%, trailing the
1.68% Red Hat (NYSE:
RHT
) garners. Still, RYT was up more than 17% year-to-date at the
start of trading today.
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