The New Nasdaq ETF: QQQE

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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.

QQEW vs. QQQ:Top Sector Exposure

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: QQEW , QQQ

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