Invesco debuts Europe’s first Nasdaq 100 equal weight ETF

Jul 13th, 2023 | By | Category: Equities

Invesco has introduced the first ETF in Europe providing equally weighted exposure to the companies that make up the Nasdaq 100.

Invesco debuts Europe’s first Nasdaq 100 equal weight ETF

Invesco has rolled out the first equally weighted Nasdaq 100 ETF in Europe.

The Invesco Nasdaq-100 Equal Weight UCITS ETF (IEWQ) is coming to market with an expense ratio of 0.20%.

The ETF tracks the Nasdaq 100 Equal Weighted Index which consists of all the constituents of the Nasdaq 100 – the 100 largest non-financial companies listed on the Nasdaq Stock Market – equally weighted on a quarterly basis.

Proponents of an equal-weight investment approach highlight how the strategy mitigates one of the most common criticisms of market capitalization-weighted indices – the concentration risk imposed by the largest constituents.

This can be a serious consideration for investors seeking Nasdaq 100 exposure as more than half (50.2%) of the index’s weight is currently allocated to just the six largest constituents: Microsoft (12.6%), Apple (12.2%), Alphabet (7.2%), Nvidia (7.0%), (6.8%), and Meta Platforms (4.4%). Data as of 11 July.

The overconcentration within the Nasdaq 100’s largest constituents is currently so severe that index provider Nasdaq has scheduled an extraordinary rebalance for later this month in order to enforce diversification requirements.

In contrast, the Nasdaq 100 Equal Weighted Index weights each of the one hundred companies at just 1.0% at each quarterly rebalance.

As well as enhanced diversification at the stock level, the equal-weight version of the index offers a more balanced sector profile with the contribution of information technology stocks significantly reduced from 58.8% to 36.8%. The index’s next-largest sector exposures are consumer discretionary (21.3%), health care (13.8%), and industrials (9.2%).

Despite diversification benefits, equal-weighted approaches may go through periods of relative underperformance, such as in momentum-driven markets and when larger firms experience growth runs beyond the return on the broad market.

Indeed, this has been the case so far this year with the Nasdaq 100 delivering a far superior performance, notching up a gain of 39.2% compared to 23.3% for the equally weighted approach. The traditional Nasdaq 100 has outperformed because the Federal Reserve’s less aggressive stance on interest rates has benefitted technology stocks, in particular, as these companies’ valuations are often based on the present value of cash flows expected far in the future.

Amid this risk-on environment, many mega-cap companies have also experienced outsized gains due to significant publicity surrounding a potential leap in artificial intelligence capabilities. Such AI technology is expected to be capitalized on primarily by larger firms.

Investors will, however, be sure to welcome the arrival of an equally weighted Nasdaq 100 ETF to their toolkits. The strategy effectively taps into the well-researched small-cap premium (the finding that smaller companies tend to outperform their larger counterparts over time) as well as offers a potential means to capitalize on the natural mean reversion of the market, whereby extreme performers (either high or low) in one period tend to trend in the opposite direction in the future.

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