However, there are some trade-offs for the same weight ETF. One is the cost. EQL has an administrative expense ratio (MER) of 0.2%, and a QQEQ of 0.28%, compared to the market cap-weighted S&P 500 ETF at just 0.09%, and the Nasdaq-100 ETF at 0.2%.
Another drawback is poor historical performance. Over the past five years, EQL has returned an annual growth rate of 13.42%, while Ishares Core S&P 500 Index ETF (XUS) delivered 14.84%. The gap is even more obvious for the exposure of NASDAQ-100. QQEQ has a three-year annual return of 12.12%, while the market equity-weighted Nasdaq 100 Index ETF (QQC) is 18.59%.
The important reason for this is that ETFs of the same weight do not allow the winner to run. In weighted ETFs in the market, the overwhelming stocks will naturally rise to the top, increasing their influence over time.
In ETFs of the same weight, these winners are systematically trimmed every quarter, while those underperformed are reclaimed to their target weight. This reduces the risk of concentration, but also means the fund misses the expanded bull market in major sectors such as Tech.
Upper index ETF
Some indexes impose caps on the weight of a single company to prevent concentration risk. In Canada, a well-known example is the S&P/TSX upper limit composite index, which limits any individual stock to 10%. The rule came after Nortel surged to more than a third of the S&P/TSX 60 by Nortel in July 2000, with investors facing extreme industry risks before stocks went bankrupt .
For Canadian investors seeking U.S. equity exposure without a technology concentration, there is now a similar option: Ishares S&P 500 3% Cap Index ETF (XUSC). The fund tracks the S&P 500 3% cap index, which prevents any company from exceeding 3% weight. If the stock exceeds this limit, excess weight is reduced and redistributed over the rest of the index during the quarterly rebalancing period.
A quick view of the breakdown of the XUSC division as of February 12 showed a balanced allocation – 22.8% of the technology. In addition, the top 10 holdings account for only 24.4% of the ETF.
However, this ETF investment strategy has its drawbacks. XUSC has higher administration fees, and while still low, it is more expensive than XUS’s 0.09% MER, which is its weighted peer in the market.
