To say the technology sector is dominating the 2023 investment landscape is an understatement and the implications of the group’s impressive year-to-date run extend beyond sheer performance.
Consider the case of supposedly diverse market-capitalization-weighted indexes. As just one example, the S&P 500 currently allocates 28.56% of its weight to tech stocks. That’s more than combined weight assigned to the healthcare and financial services sectors, the index’s second- and third-largest sector weights, respectively.
Impressive rallies by the likes of Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon (AMZN), Tesla (TSLA) and Meta Platforms (META) recently triggered an unscheduled rebalance of the famed Nasdaq-100 Index (NDX). That step was taken to reduce growing concentration risk in that benchmark and the related exchange traded funds.
Speaking of ETFs, these instruments can be the ideal avenues through which investors can combat sector and individual stock concentration risk because while cap-weighted funds dominate the landscape, there are plenty of equal-weight alternatives. And yes, some equal-weight tech ETFs provide robust tech exposure.
Invesco S&P 500 Equal Weight Technology ETF (RSPT)
The Invesco S&P 500 Equal Weight Technology ETF (RSPT) is the prime destination among dedicated tech ETFs apply the equal-weight methodology. The $3.19 billion ETF, which turns 17 years old in November, holds 66 stocks. Fun fact: None of those holdings exceed a weight of 1.74%.
Compare that with RSPT’s cap-weight rivals, some of which allocate 44%-45% of their rosters to just Apple and Microsoft. RSPT’s near-term relevance could be enhanced by a historical look at the Herfindahl-Hirschman Index (HHI).
“Tech’s current adjusted HHI level of 9.6 is in the 99th percentile of observations, indicating an extreme level of concentration for the sector compared to the long-term average of 4.9,” according to S&P Dow Jones Indices. “When concentration has been relatively high in the past, it has subsequently tended to decline.”
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE)
The Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) follows the NASDAQ-100 Equal Weighted Index – the equal-weight counterpart to the aforementioned NDX. In simple terms, each member of QQQE’s roster is set at a weight of 1% when the fund rebalances.
Predictably, that leads to significant differences between the Direxion fund and those tracking the cap-weighted NDX. For example, QQQE allocates less than 60% of its combined weight to the technology, communication services and consumer discretionary sectors. In NDX, those sectors combine for over 80%.
“Typically, an equal-weighted approach can introduce more risk to a broad-based portfolio of large, mid, and small caps, given that smaller companies tend to be more volatile than large-cap stocks,” according to Direxion. “But this has not been the case with the Nasdaq-100®, whose smallest constituents are still considered large-cap. Over the last decade, equal- and market-cap weighted strategies have exhibited similar levels of 30-day volatility.”
ALPS Disruptive Technologies ETF (DTEC)
The ALPS Disruptive Technologies ETF (DTEC) merits a place in the equal-weight tech ETF conversation because it not does provide equal-weight exposure to 10 disruptive themes, it equally weights its components.
Those themes are Healthcare Innovation, Internet of Things, Clean Energy and Smart Grid, Cloud Computing, Data and Analytics, FinTech, Robotics and Artificial Intelligence, Cybersecurity, 3D Printing, and Mobile Payments.
The $112.38 million DTEC follows the Indxx Disruptive Technologies Index and turns six years old in December.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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