Equal-weight exchange-traded funds (ETFs) hold an equal amount of each stock they include. Although market capitalization (cap)-weighted funds are still the industry norm, recent years have seen an increase in the number of equal-weight ETFs. Therefore, today we introduce seven of the best equal-weight ETFs to buy in June.
Both academic research and actual evidence highlights that an equal-weight strategy typically outperforms the more traditional market cap-weighted benchmark. According to Max Moroz and Engin Kose of Research Affiliates:
“Stocks that are temporarily overpriced automatically receive a higher weight in the cap-weighted benchmark; conversely, stocks that are temporarily underpriced are given a lower weight. This internal dynamic causes a performance drag for the cap-weight strategy: it overweights expensive stocks, magnifying the adverse return impact when their prices revert toward the mean, and it underweights cheap stocks that may be poised to rise in price.”
Put another way, ETFs that are weighted by market cap are inherently momentum-based. Let’s assume, a stock like Apple (NASDAQ:AAPL) starts increasing in price. Then the ETF automatically begins increasing Apple’s weighting in the index. If the ETF sees additional fund flow, most of the new capital goes into such higher-value companies.
On the other other hand, an equal-weight ETF takes the same set of stocks and invests in them equally. Understandably, these funds get rebalanced regularly. For example, let’s assume shares of Company X go up and shares of Company Y decline. Then the fund has to sell some shares of Company X and buy some shares of Company Y in order to balance it equally again. You could even regard it as a more contrarian, or even a value investing approach. The ETF has to purchase more shares of out-of-favor companies and, at the same time, decrease the number of shares of the recently popular ones.
One point to remember would be that due to more buying and selling in equal-weight ETFs, their expense ratios tend to be higher than their cap-weight counterparts. So you might want to keep an eye on those net expense ratios.
Against that backdrop, here are our seven equal-weight ETFs:
- ETFMG Prime Cyber Security ETF (NYSEARCA:HACK)
- First Trust Global Engineering and Construction ETF (NYSEARCA:FLM)
- Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP)
- iShares MSCI USA Equal Weighted ETF (NYSEARCA:EUSA)
- Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSEARCA:NERD)
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
- SPDR S&P Semiconductor ETF (NYSEARCA:XSD)
Now, let’s dive in and take a closer look at each one.
- 1 ETFs: ETFMG Prime Cyber Security ETF (HACK)
- 2 First Trust Global Engineering and Construction ETF (FLM)
- 3 ETFs: Invesco S&P 500 Equal Weight ETF (RSP)
- 4 iShares MSCI USA Equal Weighted ETF (EUSA)
- 5 ETFs: Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD)
- 6 SPDR S&P Biotech ETF (XBI)
- 7 ETFs: SPDR S&P Semiconductor ETF (XSD)
ETFs: ETFMG Prime Cyber Security ETF (HACK)
52-Week Range: $42.24 – $64.36
Dividend Yield: 0.10%
Expense Ratio: 0.60% per year
The cybersecurity industry is booming. According to Quince Market Insights, “The global cybersecurity market size was estimated to be USD 162.5 billion in 2020 and is projected to register a CAGR of 12.5% to reach USD 418.3 billion by 2028. The North America market is poised to capture a larger share in the global market for cybersecurity.”
Our first fund would appeal to investors interested in this segment. The ETFMG Prime Cyber Security ETF invests in businesses that provide cybersecurity solutions. They include hardware, software, consulting and services to defend against cybercrime. The fund started trading in November 2014.
HACK, which tracks the returns of the Prime Cyber Defense Index, includes 59 holdings. The sector allocation (by weighting) is Systems Software (55.3%), Communication Equipment (10.2%), Application Software (9.1%), Research & Consulting Services (8.8%) and others.
Cisco (NASDAQ:CSCO), Proofpoint (NASDAQ:PFPT), NortonLifeLock (NASDAQ:NLOK), Fortinet (NASDAQ:FTNT) and Cloudflare (NYSE:NET) are among the leading names in the roster. The top 10 stocks make up about 29% of net assets of $2.1 billion.
So far in the year, HACK is up about 2.3%, and hit an all-time high (ATH) in January. Since then, the many of the names have come under pressure. Thus the recent decline offers a better margin of safety for long-term investors.
First Trust Global Engineering and Construction ETF (FLM)
52 Week Range: $40.28-$59.94
Dividend Yield: 1.34%
Expense Ratio: 0.70% per year
The First Trust Global Engineering and Construction ETF provides exposure to global construction and engineering companies that are primarily engaged in large civil and capital projects. They include infrastructure, utilities, transportation and telecommunications businesses.
FLM, which has 56 holdings, originally followed the ISE Global Engineering and Construction Index. However, since mid-May, it has started following the Alerian US NextGen Infrastructure index. The fund’s name is expected to be changed accordingly.
The largest ten holdings comprise almost 35% of FLM’s net assets, which stand around $11.4 billion. Infrastructure construction company MasTec (NYSE:MTZ); specialty contracting services and infrastructure solutions provider Quanta Services (NYSE:PWR), technical, professional and construction services provider Jacobs Engineering (NYSE:J); global provider of technology, integrated engineering, procurement and construction services group KBR (NYSE:KBR); and global infrastructure consulting company AECOM (NYSE:ACM) are among the top companies in the fund.
In terms of country allocation, the U.S. heads the list with 28.98%. Next in line are Japan (26.96%), France (8.95%), Sweden (5.91%) and Canada (5.03%). So far this year, the fund has returned more than 17% and it hit an ATH in May. A potential decline toward the $55 level would improve the risk/return profile.
ETFs: Invesco S&P 500 Equal Weight ETF (RSP)
52-Week Range: $98.06 – $152.85
Dividend Yield: 1.36%
Expense Ratio: 0.20% per year
Our next fund, the Invesco S&P 500 Equal Weight ETF, would be appropriate for investors who want to invest in the S&P 500 index. RSP tracks the returns of the S&P 500 Equal Weighted Index. Both the index and the fund are rebalanced quarterly. Since its inception in April 2003, net assets have reached $28.6 billion.
The top 10 stocks comprise about 2.5% of the fund. Among the leading names are the steel group Nucor (NYSE:NUE), railroad operator Kansas City Southern (NYSE:KSU), consumer credit reporting group Equifax (NYSE:EFX) and NortonLifeLock. Tech giants, such as Apple, Microsoft (NASDAQ:MSFT), or Facebook (NASDAQ:FB), each has a weighting of 0.20%.
In the past 12 months, RSP is up 43% and has returned 19% year-to-date (YTD). By comparison, the S&P 500 index is up 35% in the past year and 12% YTD. Put another way, the size factor has meant that RSP has outperformed the returns of the index in recent months. Both the ETF and the index saw record highs in early May. RSP could be appropriate for most long-term portfolios. A potential decline toward $147.5 would offer better value.
52-Week Range: $54.92 – $84.07
Dividend Yield: 1.15%
Expense Ratio: 0.15% per year
The iShares MSCI USA Equal Weighted ETF, which tracks the returns of the MSCI USA Equal Weighted Index, started trading in May 2010. The fund provides exposure to mid- and large-cap U.S. equities.
The top sector allocation is Information Technology, IT, (18.85%), Industrials (13.81%), Health Care (13.62%), Financials (13.14%) and Consumer Discretionary (10.72%).
The fund has 626 holdings which are equally weighted. Top ten holdings make up about 1.92% of net assets, which are over $437 million. Automotive industry heavyweight Ford Motor (NYSE:F), life science technology company 10X Genomics (NASDAQ:TXG) and New York-based interactive fitness platform Peloton Interactive (NASDAQ:PTON) top the list of holdings.
So far, in 2021 the fund is up about 16% and returned about 42% in the past 52 weeks. Potential investors would find better value around $80, or below.
ETFs: Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD)
52-Week Range: $18.53 – $39.38
Dividend Yield: 0.97%
Expense Ratio: 0.50% per year
The Roundhill BITKRAFT Esports & Digital Entertainment ETF focuses on e-sports and gaming. The fund invests in streaming network operators, video game publishers, league organizers and competitive team owners. The ETF started trading in June 2019.
NERD, which tracks the returns of the Roundhill BITKRAFT Esports Index, has 35 stocks. The top sectors include Games (41.3%), Hardware (27.7%) and Media (22.7%). Almost 29% of the companies come from the U.S. Next in line are firms based in China (19.2%), Japan (8.8%), South Korea (7.9%), Sweden (7.4%), Singapore (7.3%), Taiwan (6.9%) and others.
The leading 10 names holdings comprise 43% of net assets of $102 million. Interactive entertainment content publisher Activision Blizzard (NASDAQ:ATVI), Sweden-based entertainment name Modern Times, China-based Tencent (OTCMKTS:TCEHY), gear provider for gamers and content creators Corsair Gaming (NASDAQ:CRSR) and South-Korea based media platform services provider AfreecaTV top the list of current holdings.
YTD, the fund is up about 5.4% and saw a record high in mid-February. Over the past 52 weeks, the fund has returned almost 67%. Given the recent decline in price, buy-and-hold investors could find value around these levels.
SPDR S&P Biotech ETF (XBI)
52-Week Range: $97.15 – $174.79
Dividend Yield: 0.24%
Expense Ratio: 0.35% per year
Our next ETF comes from the health space. The SPDR S&P Biotech ETF invests in 170 biotechnology stocks. The fund started trading in January 2006, and net assets stand at $6.8 billion.
XBI tracks the returns of the S&P Biotechnology Select Industry. Around 9.5% of the fund is in the top 10 companies, whose market caps range from $1.1 billion to $75 billion.
Among the top names in its roster: Moderna (NASDAQ:MRNA), which has developed one of the leading vaccines against the novel coronavirus; Curis (NASDAQ:CRIS), which focuses on cancer treatments; Humanigen (NASDAQ:HGEN) and BioCryst Pharmaceuticals (NASDAQ:BCRX), which concentrate on rare diseases; and United Therapeutics (NASDAQ:UTHR), which focuses is on treatment of chronic and life-threatening conditions.
Most readers would concur that the biotechnology sector is innovative. The race to develop vaccines and treatments for Covid-19 acts as a testament to the growth potential and the importance of the industry. In the past 52 weeks, XBI returned more than 21% and hit an all-time high on Feb. 9. However, YTD, the fund is down 10%. Potential investors could consider investing in XBI around the current level.
ETFs: SPDR S&P Semiconductor ETF (XSD)
52-Week Range: $105.56 – $203.60
Dividend Yield: 0.23%
Expense Ratio: 0.35% per year
Chip stocks have recently come under pressure, in part due to the global shortage that has been making headlines. So far in 2021, the widely followed Philadelphia Semiconductor Index is up about 12% and hit a record high in early April. But since then, the index has lost some of the annual gains.
Given the importance of the industry, our next fund could appeal to a range of growth investors. The SPDR S&P Semiconductor ETF gives exposure to 39 semiconductor shares across a range of market caps.
XSD, started trading in January 2006. The top ten names comprise almost 30% of net assets of $913 million. Chip heavyweights Nvidia (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN); Lattice Semiconductor (NASDAQ:LSCC), which holds a market cap of $7.4 billion; and Maxim Integrated Products (NASDAQ:MXIM), which concentrates on analog circuits make up the top names in the roster.
Over there past year, XSD has returned 60%. But, YTD, it is up only about 5%. In the case of further weakness in the industry, a decline toward $170 could be possible. Interested readers should consider buying the dips.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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