An Equal-Weight Spin On Investing In The Nasdaq 100

Thanks to the likes of Apple Inc. AAPL, Amazon.com Inc. AMZN and Facebook Inc. FB, just to name a few, the NASDAQ-100 Index is up almost 24 percent. That serves as an example of weighting stocks by market capitalization working in investors' favor.

Even with the boffo performances being put up by Apple, Facebook and other large- and mega-cap technology stocks, some equal-weight spins on the NASDAQ-100 Index are performing admirably as well. For example, the Direxion NASDAQ-100 Equal Weighted Index Shares QQQE is almost 21 percent year-to-date.

QQQE tracks the NASDAQ-100 Equal Weighted Index, which includes 100 of the largest non-financial securities listed on NASDAQ. Rather than weighting holdings by market capitalization, each of the constituents is initially set at 1 percent, according to Direxion.

Big Differences

Obviously, as an equal-weight ETF, QQQE presents investors with significant differences relative to the cap-weighted version of the NASDAQ-100 Index. For example, the traditional NASDAQ-100 Index allocates about 29 percent of its combined weight to just three stocks – Apple, Alphabet Inc. GOOG and Microsoft Corp. MSFT.

As such, the standard NASDAQ-100 devotes over 57 percent of its weight to the technology sector. By comparison, QQQE's technology weight is just over 39 percent. The Direxion ETF is overweight consumer discretionary stocks relative to the NASDAQ-100 by about 460 basis points. At a time when biotechnology stocks surging, QQQE has an advantage over the NASDAQ-100 by overweighting the healthcare sector by more than 800 basis points, according to issuer data. 

QQQE's strategy allows for “broader diversification beyond technology sector stocks which may help reduce concentration risk,” according to Direxion, as well as a greater performance contribution from companies with smaller market caps.

Other Perks

An obvious benefit of an equal-weight strategy is that if big-name stocks, in this case, the likes of Apple and Facebook, slump, the equal-weight index should perform less poorly. There other benefits as well.

“Performance contribution in market weighted indexes such as the S&P 500 Index or NASDAQ-100 Index is typically driven by a small number of very large companies with market caps that are considerably higher than the average,” Direxion notes. The equal-weighted fund results in "a potentially more diversified performance contribution from the individual companies, and sectors that are in the index.”

Investors have added $40.1 million to QQQ this year.

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