Advisers favour benefits from equal weighted ETFs
Equal weighted ETFs are gaining ground with financial advisers, according to AUSIEX, as they believe they can bring balance to client portfolios.
With equal weights to all their constituents, equal-weighted ETFs allow advisers to reduce the dominance of a small number of stocks and instead hold a broader range of exposures across multiple sectors, particularly as ASX concentration is currently at elevated levels.
For example, the big four Australian banks make up almost a quarter of the ASX 200 Index, while the 10 largest ASX stocks make up almost half of the index’s total weight. This compares to the US where the 10 largest stocks in the S&P 500 make up around a third.
Due to the “structural rebalancing effect”, AUSIEX said equal weighted strategies can outperform market cap weighted ones by trimming stocks that have risen in price and adding to those which have fallen.
Equal weighted ETFs available include Betashares S&P 500 Equal Weight Currency Hedged ETF, VanEck Geared Australian Equal Weight Complex ETF, and Betashares NASDAQ 100 Equal Weight ETF, while the VanEck Australian Equal Weight ETF was among the top ETF purchases by SMSF investors with more than $3 million.
Chris Hill, national manager of strategic relationships at AUSIEX, said: “While traditional ETFs that track indices still dominate the market, equal weighted ETFs offer a way to dilute the influence of dominant stocks and give greater emphasis to the market’s underrated mid-caps.
“In this environment, equal weighted ETFs appear to be finding a role as financial advisers, investors, and SMSFs seek ways to reduce volatility and achieve more diversified exposure.
“Now, as concentration risk has deepened in the Australian market, equal weighted strategies may provide one of the few systematic ways to offset this growing imbalance. By systematically rebalancing exposure away from frothy valuations and towards a more balanced cross-section of the market, investors can potentially avoid the momentum bias inherent in market cap weighted indices.”
However, he noted that financial advisers need to be aware of the potential trade-offs of these strategies which include higher turnover and costs from the higher frequency of rebalancing activity.
AUTHOR
Laura Dew
Recommended for you
The FSCP has issued a written direction to an adviser who charged clients “extraordinary fees” for inappropriate and conflicted advice, as well as encouraged them to switch their superannuation into a poorly performing product.
With adviser losses set to continue, Wealth Data founder Colin Williams has detailed which business model is likely to drive the exodus.
Traditional relationships between advisers and business development managers are evolving, with the expectations for them to provide meaningful guidance to the advice practice.
Padua Solutions has poached an individual from Colonial First State to take on a newly created role focused on overseeing its technical capabilities.
