Innovation, high-growth, iconic brands, diversity, and global-appeal—all these define today’s modern-day companies that comprise the Nasdaq-100 Index. Impressive names like Amazon, Apple, Costco, Celgene, Starbucks, Tesla, Pepsi, Alphabet, Facebook, Cisco, Intel, Microsoft, Adobe, Netflix, NVIDIA, Gilead, and Amgen in its universe, Nasdaq-100 offers a compact, large cap composition of companies, which is ideal for any investor's core portfolio.
Here's a look at the equal-weighted strategy to take exposure to the 100 companies constituting the Nadaq-100 Index.
Market-Cap Weighting Versus Equal-Weighting
Launched in 1985, the Nasdaq-100 (NDX) is the most popular medium to take exposure to the top 100 companies on the Nasdaq exchange. NDX is a composition of the top 100 of the largest domestic and international non-financial companies (according to the Industry Classification Benchmark) which are listed on the Nasdaq Global Select Market or the Nasdaq Global Market. NDX is a modified market-cap-weighted index wherein its constituents are weighted based on their size. Currently, the top 10 heavyweights represent roughly 53% of the index. The index has approximately 57% exposure to technology sector, followed by sectors such as consumer services (20%), consumer goods (8%), healthcare (7%), and industrial (5%) with very small allocations towards telecommunications, utilities, and basic materials.
For more on investing in the NDX, see this article: How and Why to Invest in NDX.
An equal-weighted index has the same roster of companies, but is different in its style of assigning weightage to each constituent. The Nasdaq-100 Equal Weighted Index (NDXE) was launched in 2005, and each company in the index is given a 1% weightage. The equal allocation to all the companies in the index results in a different sectoral allocation as well:
|
NDX |
NDXE |
|
|
Technology |
57.31% |
41.90% |
|
Consumer Services |
20.17% |
20.77% |
|
Consumer Goods |
8.33% |
10.03% |
|
Healthcare |
6.53% |
14.10% |
|
Industrials |
5.21% |
8.14% |
|
Telecommunications |
1.33% |
1.00% |
|
Utilities |
0.90% |
3.03% |
|
Basic Materials |
0.22% |
1.03% |
Based on Nasdaq indices data
A market-cap-weighted index tends to typically double down on its best-performing constituents. While this strategy works great during momentum play, it overlooks the value angle as a result. This usually results in high concentration towards top holdings. On the other hand, the approach of giving equal weightage provides broader diversification among market segments, resulting in a more balanced exposure across companies and sectors, thereby reducing the concentration risk. The quarterly rebalancing results in profit booking from outperformers while buying underperformers, thereby embracing features of both growth and value investing.
There are two exchange traded funds (ETFs) which provide exposure to the Nasdaq-100 Equal Weighted Index.
Launched in April 2006, the First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW) has $1.285 billion as assets under management and an expense ratio of 0.58%. Currently, the top holding is at 1.28%. The equal-weighted methodology negates the impact of a sharp downward price swing of an individual stock. The top ten holdings of the fund currently add up to 10.83%, and the names include:
- Moderna (MRNA)
- Apple (AAPL)
- Skyworks Solutions (SWKS)
- O’Reilly Automotive (ORLY)
- Copart (CPRT)
- IDEXX Laboratories (IDXX)
- Paychex (PAYX)
- Starbucks (SBUX)
- Adobe (ADBE)
- Intuitive Surgical (ISRG)
The other ETF that tracks the Nasdaq-100 Equal Weighted Index is the Direxion Nasdaq-100 Equal Weighted Index (QQQE), which was launched in March 2012. The fund has a $387.857 million as assets under management, and an expense ratio of 0.35%. The top holding currently has an allocation of 1.14% while the top ten holdings add up to 10.69%, and they are:
- Moderna (MRNA)
- Skyworks Solutions (SWKS)
- Apple (AAPL)
- IDEXX Laboratories (IDXX)
- Peloton Interactive (PTON)
- O’Reilly Automotive (ORLY)
- Paychex (PAYX)
- Starbucks (SBUX)
- Intuitive Surgical (ISRG)
- eBay (EBAY)
Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared based on information on Nasdaq indices. Any exclusions or errors in it are totally unintentional. The current portfolio composition, expense ratio, AUM and other specific details are as on July 15, 2021.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Prableen Bajpai
Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.
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