Direxion launches NASDAQ-100 Equal Weighed ETF

Mar 21st, 2012 | By | Category: Equities

Direxion, a US-based leader in leveraged and inverse ETFs, has continued its product diversification with the launch of the Direxion NASDAQ-100 Equal Weighted Index ETF (QQQE). The fund provides investors with broader diversification and exposure to the holdings that comprise the NASDAQ-100 index.

Direxion launches NASDAQ-100 Equal Weighed ETF

Direxion has expanded its ETF lineup with the launch of the NASDAQ-100 Equal Weighed ETF (QQQE).

The traditional market-cap weighted NASDAQ-100 index currently has a significant overweighting to a select number of companies, and a heavy bias toward the technology sector, based on the market capitalisation of these few companies.

With the traditional market-cap index larger companies receive a higher weight than small companies, which can lead to a portfolio with an over concentration in a limited number of companies and industries.

In terms of concentration, the top five holdings in the traditional market-cap index (Apple, Microsoft, Google, Oracle and Intel) account for a whopping 43% of the total. Any decline in these holdings, therefore, would have a significant effect on the return of any ETF benchmarked to this index. And with Apple making up almost 19% on its own, investors are vulnerable to profit-taking following the stock’s recent meteoric rise. More broadly, though, ETFs tracking the traditional market-cap weight index are particularly susceptible to under-performance and stock-specific events in just a handful of companies.

By contrast, the Direxion NASDAQ-100 Equal Weighted Index ETF utilises a methodology that weights the holdings of the index equally, regardless of market capitalisation or industry. This means performance is significantly less reliant on a few mega-cap companies. With each constituent receiving a 1.00% weight, the resulting portfolio is considerably more diversified and holds meaningful positions in all 100 of the index’s constituents.

Along with increased diversification, equal weighting offers greater performance potential over market-cap weighted strategies, as smaller companies tend to outperform larger counterparts (the small-cap premium). Perhaps the best evidence for this came from Professor Kenneth French, famous for his work with Eugene Fama on asset pricing, who demonstrated conclusively that US small caps outperformed large caps in the period 1927 to 2009. Numerous other studies corroborate this observation.

In addition, an equal-weighted strategy capitalises 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.  This is because at rebalancing the recent best performing stocks are trimmed down to weight (taking profits), while the recent underperformers are bought up (buying more of the stock at a lower price).

The strategy also benefits from disciplined rebalancing – the index is reviewed and adjusted annually in December and is rebalanced quarterly in March, June, September and December – which results in unbiased exposure to market risk factors and potential opportunities for long-term equity performance.

The fund is listed on the NYSE Arca and comes with a Total Expense Ratio (TER) or 0.35%.

The launch from Direxion will likely put pressure on First Trust NASDAQ-100 Equal Weight Index ETF (QQEW), which currently has a TER of 0.60%.

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