Nasdaq-100 Index: Cap-Weight vs Equal-Weight
The PowerShares QQQ Trust QQQ was the first ETF to begin tracking the Nasdaq-100 Index. It was launched in March 1999 and is currently the 9th largest ETF listed in the US, with about $39 billion in AUM. The “Q’s” were designed to mirror the “modified cap-weight” index, so it will naturally behave very much like the largest components of the Index. In fact, the top 10 stocks comprise nearly 50% of the Index (leaving the other 50% to the bottom 90 stocks). The top two holdings (Apple and Microsoft) make up 18% of the Index.
You can access exposure to those same 107 stocks included in the Nasdaq-100 Index through the First Trust Nasdaq-100 Equal Weighted Index Fund QQEW. However, unlike the QQQ, this ETF tracks the “equal-weighted” Nasdaq-100 Index NDXE, bringing each component of the Index to a weighting of roughly 1%. Relating this back to our example above, the “Q’s” are essentially the House of Representatives of the Nasdaq-100, while QQEW would be akin to the Senate.
The technical picture for both the equal-weighted and cap-weighted Nasdaq 100 products is positive. The default trend charts above have rallied nicely from their June pullbacks; however there are some differences between the two. Notice that while the QQEW still faces resistance around $45.5 from June of 2015, the QQQ has managed a new 52-week high and sits within one box if its all-time high set back in March of 2000. As a result, one would be correct in assuming that the larger weighted names have contributed to a great extent in the most recent push higher. We can look to an RS between the two funds to gain additional perspective on equal weightings versus cap weighting as it relates to the Nasdaq 100 stocks. Because the funds are highly correlated, we ran the RS comparison on a sensitive 1% scale shown below. The chart has maintained a Buy Signal since August 2011, favoring QQQ and provided further confirmation for cap weighted exposure. During this time, the QQQ is up about 105% compared to 88% for the QQEW (through 8/1/16). It is worth noting that both have outpaced the S&P 500 Index, which is up roughly 73% over the same time.