|This year has seen remarkable market performance, with the S&P 500 up ~12% and Nasdaq 100 ~35%. But now it is time for investors to start thinking about the power of equal weighting.The current rally has been predominantly driven by a handful of stocks, fuelled by AI hype. As a consequence, mainstream indices have become alarmingly divergent and concentrated, posing significant concentration risk.
In fact, over 50% of the Nasdaq 100 is now composed of just seven companies: Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta, and Tesla. Moving forward, the Nasdaq will be highly vulnerable to the performance of these few dominant players. This concentration poses a potential risk for investors who rely solely on the Nasdaq for exposure to the technology sector.
In stark contrast, HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) presents much more diversified exposure to tech stocks through eight sub-themes and 120 equally weighted holdings.
ITEK’s top seven holdings account for a combined 13%, significantly lower than the Nasdaq 100’s top seven holdings, which hover around 50%. By reducing reliance on heavily weighted stocks, ITEK’s methodology provides a broader-based approach that mitigates concentration risk and delivers a more balanced exposure to technology stocks. For many investors, ITEK offers an appealing core tech holding compared to the top-heavy and concentrated Nasdaq 100.
|Benefits of Equal Weighting
Diversification: Equal weighting an index ensures that each constituent stock or asset has an equal influence on the overall performance of the index. This approach helps to spread the risk more evenly across all holdings, reducing concentration risk.Higher small or mid cap exposure: Since equal-weighted indices allocate equal amounts to each stock, smaller companies with potentially high growth potential have a greater impact on the index’s performance.Avoidance of Overvaluation: In market-cap weighted indices, stocks with higher market capitalizations have a larger weighting, regardless of their fundamental value. This can lead to overvaluation, as investors may flock to popular stocks, driving their prices higher. By equal weighting an index, it helps prevent this distortion, as each stock is given an equal weight regardless of its market capitalization. This approach can potentially reduce the risk of investing in overvalued assets.
Rebalancing Opportunity: Equal-weighted indices require periodic rebalancing to maintain the equal weight allocation. This rebalancing process entails selling the outperforming stocks and buying the underperforming ones, which can help investors capitalize on the buy low, sell high principle.
|Funds Employing Equal Weighting