Investors are increasingly turning to equal weight exchange traded funds (ETFs) for diversification as just 10 companies make up 50 per cent of the ASX 200 index, VanEck Australia said.
VanEck Australia’s director of investments and strategy, Russel Chesler, said equal weight ETFs were a form of smart beta investing and generated outperformance.
Equal weight ETFs literally equally weighed all securities in a portfolio, so that reduced investor’s concentration risk, both at a company and sector level, he said.
In the United States smart beta accounted for $400 billion. In Australia that market had also significantly grown, he said. In August alone, 27 per cent of flows were invested into smart beta strategies.
“The long-term performance of the equal weight index has been significantly better than the ASX200. It’s not just performance in a single year. It had sustained better performance. It outperformed the ASX200 in 10 out of the last 13 calendar years”.
The Money Management Investment Centre (MMIC) showed Van Eck’s equal weight ETF outperformed its index since inception and produced a 19 per cent return year-on-year.
The fund held 81 Australian stocks, all weighted at 1.23 per cent. It held assets in all sectors, he said.
“So there are industrials in the portfolio, resources, healthcare, and consumer discretionary.”
CSIRO and Monash University conducted extensive research into equal weighting and found that there were three key reasons why it outperformed, he said. It had higher exposure to smaller stocks, rather than bigger stocks, higher exposure to value stocks and performed better in rising markets and fell less in sliding markets.
To see how the fund performance against the index, click here.
