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Direxion, one of the largest issuers of leveraged and inverse ETFs, announced the addition of a non-leveraged ETF this week that will offer a unique way to access one of the world’s most widely followed benchmarks. The new Nasdaq -100 Equal Weighted Index Shares (NYSEARCA:QQQE) will focus on the largest stocks listed on the tech-heavy Nasdaq, but will implement a unique weighting methodology that delivers a balanced, diversified portfolio.

Along with the Dow and the S&P 500 (NYSEARCA:SPY), the Nasdaq is one of the best known barometers for U.S. equity exposure. The Nasdaq has become a popular primary listing destination for technology stocks over the last several years, with companies such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Oracle (NYSE:ORCL) headlining the exchange. Exposure to the Nasdaq index through ETFs has also become quite popular; the PowerShares QQQ (NASDAQ:QQQ) is one of the oldest and largest ETFs. Since debuting in 1999, the fund has accumulated close to $35 billion in assets [see also ETFs To Bet Against Apple].

Nasdaq ETFs: QQQ vs. QQQE

Because the Nasdaq has a disproportionate number of technology giants listed there, index-based products linked to this benchmark have developed a few quirks. First, there tends to be a bias toward the tech sector; technology companies make up more than half of QQQ. And because some of these tech firms are among the largest companies in the world, ETFs linked to the Nasdaq can be a bit top-heavy. QQQ, for example, allocates about 16% of its portfolio to Apple and another 9% to Microsoft. The 10 largest components make up about 55% of total assets [see Equal Weight ETFdb Portfolio].

QQQE will be linked to an index that offers equal-weighted exposure to the Nasdaq 100, meaning that each component stock will be weighted at 1% of the total portfolio upon rebalancing. So while QQQ and QQQE will have near perfect overlap, there will be a few substantial differences in the composition of the portfolios:

  • QQQE will be less “top heavy” than QQQ; top ten holdings will represent only about 10% of total assets, as opposed to 55% for QQQ
  • QQQE will have a heavier allocation to small cap and mid cap stocks
  • Sector breakdowns between QQQE and QQQ may differ significantly

“This fund is designed to provide investors with balanced exposure and reduce concentration risk without overweighting potentially overvalued companies and underweighting undervalued companies,” said Daniel D. O’Neill, President and Chief Investment Officer of Direxion. “Investors are increasingly embracing an equal weighting approach to complement other U.S. large-cap equity strategies that tend to be more highly concentrated in a select number of industries.”

Indeed, a number of ETF issuers have been developing and launching ETFs that are linked to equal-weighted indexes in recent years. Rydex (recently rebranded under the Guggenheim umbrella) offers the S&P Equal Weight ETF (NYSEARCA:RSP), which holds the 500 or so components of the S&P 500 in equivalent allocations. State Street offers a number of sector-specific ETFs that are linked to equal weighted indexes.

Nasdaq ETFs: Beyond QQQ

QQQE joins a number of other ETFs that offer exposure to the tech-heavy Nasdaq, including the ultra-popular QQQ. A handful of other products focusing on this market include:

  • Nasdaq 500 ETF (QQQV)
  • Nasdaq Composite Index Tracking Stock (NASDAQ:ONEQ)
  • Nasdaq 100 Ex-Technology Sector Index (NASDAQ:QQXT)
  • Nasdaq 100 Trendpilot ETN (NYSEARCA:TNDQ)
  • Nasdaq 400 Mid Cap ETF (QQQM)

First Trust also offers an ETF linked to an equal weighted version of the Nasdaq 100; QQEW debuted in 2006, and has assets of about $92 million. The First Trust ETF charges 0.60% in annual management fees; the new Direxion fund will be much cheaper at just 35 basis points per annum.

Disclosure: No positions at time of writing.

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Source: Direxion Debuts Equal Weight Nasdaq ETF