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Highlights
- Equal weight ETFs offer a unique diversification strategy across all index constituents.
- Recent performance gaps driven by tech and bank concentration.
- Long-term potential still attracts attention amid evolving market dynamics.
Exchange-traded funds (ETFs) have long been hailed for simplifying investing, combining low costs with wide market exposure. Among the many ETF approaches, the equal weight strategy stands out by offering an even distribution of investment across all companies in an index—irrespective of their size. But as the market landscape shifts, the question arises: could this method shine in the ASX200 index?
Breaking Away from Market Weights
Traditional index ETFs typically mirror the market by allocating more capital to larger companies. In contrast, equal weight ETFs allocate the same dollar value to every company in the index. This means that smaller players get the same attention as the giants. While that might sound like a minor tweak, it significantly alters risk and return profiles.
The approach is particularly appealing when smaller or mid-sized companies outperform their larger peers. It also limits overexposure to mega-cap firms that may be trading at elevated valuations. The theory suggests that this method should perform better over the long term due to higher growth potential in smaller firms.
The Reality Check: Big Banks and Tech Giants Rule
Looking closer to home, the S&P/ASX200 is dominated by the big four banks, collectively accounting for over 24% of the index. Among them, Commonwealth Bank (ASX:CBA) has notably delivered strong returns. During such periods, traditional index ETFs benefitted more, as they increased their holding in outperforming stocks like CBA.
Similarly, in the U.S. market, an equal weight ETF on the S&P 500 has underperformed the standard S&P 500 by 3.5% on average over the past five years. Much of this gap is attributed to tech behemoths like Apple (ASX:AAPL), Microsoft (ASX:MSFT), Tesla (ASX:TSLA), Nvidia (ASX:NVDA), and Meta (ASX:META), whose stellar rallies weren't fully captured by equal weight ETFs due to regular rebalancing.
Why the Long Game Still Matters
Despite these headwinds, proponents argue that equal weight strategies offer lower concentration risk and better balance over time. As the dominance of certain sectors wanes, the benefits of even distribution could become more apparent.
Also gaining popularity are semi-active ETF strategies that factor in business quality and economic moats. While these options typically carry higher fees, they’ve seen relatively stronger performance during uncertain cycles, compared to equal weight approaches.
Still, equal weight ETFs remain a viable strategy for those seeking broader exposure across all index players—including lesser-known ASX dividend stocks like these—especially when sectoral rotations and market corrections level the playing field.
With the market entering a potential shift from growth to value or cyclical leadership, the next leg up for equal weight ETFs might already be in motion—even if it’s not immediately visible.
