Diversified, low-cost index and exchange traded funds are arguably cornerstones of well-built, long-term investment portfolios. Most advisors and investors deployed market capitalization-weighted ETFs in this capacity, but equal-weight funds deserve more playing time on the long-term portfolio field.
In particular, the PowerShares Russell 1000 Equal Weight Portfolio (NYSE:EQAL) is worthy of consideration as a building block in a long-term portfolio. The rub is that potential user of the PowerShares Russell 1000 Equal Weight Portfolio will have to get over the fact that EQAL itself is not old. The ETF quietly debuted in late 2014 and now home to $154.1 million in assets under management, can lay claim to being one of the most successful ETFs to debut last year.
Not to invoke a clich, but EQAL is not your grandfather's equal-weight ETF. Old guard equal-weight ETFs typically just equally weight the stocks found within the fund. EQAL goes a step further by also equally weighting each stock within the 10 sectors represented in the fund.
For example, the technology sector accounts for almost 13.3 percent of EQAL's weight meaning there are approximately 130 tech stocks in the fund. EQAL's tech holdings range in weight from 0.04 percent to 0.16 percent, while no individual holding commands more than 0.23 percent of the ETF's weight.
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EQAL is "re-weighted at the close of the last business day in March and September, and at the close of third Friday in December. It is also re-weighted at the close of the last business day in June when the Russell 1000 is reconstituted,"according to PowerShares.
Data suggest that if EQAL was an old ETF, it would be sporting a lengthy track record of out-performance over cap-weighted funds tracking the Russell 1000 Index.
"The U.S. large cap Russell 1000 Equal Weight Index outperformed its market capitalization weighted counterpart the U.S. large cap Russell 1000 Index for the three- and ten-year periods (annualized) ended October 2, 2015, while the market capitalization weighted index outperformed its equal weight counterpart for the year-to-date, one year and five year periods as shown in the chart below," according to FTSE Russell.
Equal-weight ETFs are viewed as one of the forefathers of the smart or strategic beta ETF movement, one of the fastest-growing segments of the ETF industry.
According to FTSE Russell's first U.S. retail financial advisor market survey - Smart Beta: 2015 survey findings from U.S. financial advisors - 68 percent of financial advisors polled are using smart beta ETFs and 70 percent are using multiple strategic beta approaches.
That data support increased professional investor adoption of EQAL going forward. While past performance is no guarantee of future returns, noteworthy is the fact that EQAL's underlying index outpaced its cap-weighted counterpart by 230 basis points over the past decade, according to FTSE Russell data.
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