A New ETF Right for These Times

A new ETF can gain traction by offering advisors and other market participants an investment objective that’s conducive to the environment in which those funds are debuting.

It launched last week so the jury is still out, but the Invesco QQQ Equal Weight ETF (QEW) could prove to be a beneficiary of good timing. That’s not the result of equal weighting being a short-term, get rich quick strategy. It’s not. However, QEW’s potential near-term appeal is rooted in factors playing out in real time, including ongoing concerns about concentration risk.

As has been widely discussed, a small number of S&P 500 member firms command significant percentages of that index and the top three holdings in the Invesco QQQ Trust (QQQ) combine for approximately 22% of that ETF’s portfolio. Data points such as those may be indicative of QEW being appropriate for the current market environment.

QEW, an ETF for Now and Later

QEW, which tracks the Nasdaq‑100 Equal Weighted™ Index, clearly has near-term appeal, but it also long-term utility.

Equal weighting “achieves better diversification from a sector perspective as well as from individual companies through an equal weighted allocation to all stocks,” noted UBS. This also increases the opportunity to participate in the growth story of a small or medium-sized company. When looking at long-term performance, the equal-weighted index outperformed the standard market-capitalization weighted index.

QEW, which charges 0.25% per year, stands as a valuable alternative for advisors looking to avoid concentration. It’s possible that, over time, the new ETF will also benefit from what UBS calls the “rebalancing effect.” This can produce higher long-term returns. Essentially, that’s about how equal-weight ETFs, when they rebalance, trim exposure to stocks that may be overvalued.

Another reason QEW may be appropriate is because mega-cap growth stocks are taking breathers. Some are in corrections, if not in outright bear markets.

“Historically, equal weighted indices have at times outperformed their market capitalization weighted counterparts, especially during periods when major market leaders do not dominate,” added the bank.

Think of QEW as a problem-solving ETF. It reduces the burdens of concentration risk and market timing while potentially boosting end users’ exposure to the benefits of the size and value factors. That combination could be attractive over the long haul.

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