The Direxion Nasdaq-100 Equal Weighted Index Shares fund
(NYSEArca:QQQE) charges 0.35 percent, severely undercutting the
First Trust Nasdaq-100 Equal Weighted ETF (NYSEArca:QQEW) at 0.60
percent.
Both funds track the Nasdaq-100 Equal Weighted Index. Neither
uses leverage.
First Trust's QQEW is an established fund with middling assets
in the neighborhood of $100 million. The Direxion folks must figure
that a much lower hurdle will win some investor dollars from QQEW
and maybe attract new interest in the strategy.
On paper at least, the strategy-an equal-weighted approach to
the Nasdaq-100-makes sense in two ways.
First, the Nasdaq-100 is notoriously concentrated:Apple is
currently around 19 percent. An equal-weighted index brings that
down to about 1 percent, which significantly reduces single-stock
blowup risk if Apple's remarkable run fizzles out.
Second, when equal weighting is applied to a shallow universe,
100 stocks in this case, the typical risk factors that come from
this strategy-small-cap bias and increased beta-are mitigated when
compared to equal-weighting a deeper universe.
Performance data over the past three years indeed suggest only
slightly elevated risk for the equal-weighted strategy relative to
the plain-vanilla Nasdaq-100. I found beta of 1.06 for the period
using daily returns.
But unfortunately, the returns for the equal-weighted strategy
lagged the Apple-dominated regular Nasdaq-100 for the period,
doubtless due to AAPL's rock-star performance.
,%20returned%20130.8%20percent%20for%20the%20period,%20while%20%E2%80%9CXNDX,%E2%80%9D%20the%20plain-vanilla%20Nasdaq-100%20index%20(dark%20blue),%20returned%20136.2%20percent.%3C/p%3E%0A%3Cp%3EBear%20in%20mind%20that%20for%20much%20of%20this%20period,%20AAPL%E2%80%99s%20share%20of%20the%20plain%20Nasdaq-100%20was%20even%20bigger%20than%20it%20is%20now.%20In%20this%20context,%20that%20fact%20that%20the%20equal-weighted%20strategy%20even%20kept%20pace%20is%20notable.%3C/p%3E%0A%3Cp%3EStill,%20more%20risk%20for%20less%20return%20isn%E2%80%99t%20typically%20the%20road%20to%20riches.%3C/p%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Chr%20class='system-pagebreak'%20/%3E%0A%3Cp%3ETurning%20to%20sector%20exposure,%20the%20breakdowns%20are%20a%20bit%20unexpected.%20I%E2%80%99m%20using%20Bloomberg%20data%20for%20First%20Trust%E2%80%99s%20QQEW%20and%20the%20PowerShares%20QQQ%20Trust%20(NasdaqGM:QQQ)%20as%20proxies%20for%20the%20equal-weighted%20and%20vanilla%20versions%20of%20the%20Nasdaq-100.%20(I%E2%80%99m%20assuming%20QQEW%E2%80%99s%20and%20QQQE%E2%80%99s%20exposure%20are%20quite%20similar.)%3C/p%3E%0A%3Cp%3EWith%20Apple%20at%20a%20much%20lower%20weight,%20broad%20tech-sector%20exposure%20for%20the%20equal-weighted%20approach%20is%20reduced,%20in%20favor%20of%20consumer%20stocks.%3C/p%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Cp%3E%3Cimg%20src=)
While the equal-weighted strategy is still dominated by tech,
this relative bias toward consumer stocks may turn some investors
off. After all, people associate Nasdaq with tech, not with
consumer stocks.
To sum up:Let's face it, any vehicle that underweights Apple
just isn't going to look good when comparing recent performance.
QQQE and QQEW are effectively betting against the tech giant,
relatively speaking, while still maintaining broad-if somewhat
diluted-tech exposure.
For those who buy the equal-weighted thesis and like QQQE's
lower fee, there are some practical points to note.
For one, we've noticed trading problems from time to time with
newly launched funds, such as the ones on the Yorkville MLP ETF
(NYSEArca:YMLP) a few weeks back.
Even without such anomalies, spreads for new funds like QQQE
might be wider than those for established funds.
The takeaway? Use limit orders when trading to make sure your
expense ratio savings aren't wiped out by unexpected execution
costs.
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