Traditional QQQ Weighting
click for larger graphic

Source: Nasdaq

 

Long overdue and excellent idea:

Part of the problem with the Nasdaq QQQ’s has bee on the oversize weighting of a few giant market names in it. Certainly Apple (AAPL), but also Microsoft (MSFT), Google (GOOG) and others. Note that chart above dates from 12/31/2012 — after Apple began its slide, and yt still, it was almost 1/6th of the Qs.

The new QQQE is an equal weight set of Nasdaq holdings, each contributing 1% to the overall mix. This reduced  Information Technology from 63% to 49%, and raises just about all other sectors in the index.

I’d love to see a chart comparing the cap weighted and equal weighted indices.

 

 

UPDATE: February 9 2013 5:39pm

Tom Brakke of The Research Puzzle sends along this chart

Category: Index/ETFs, Technology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “QQQE: Equal Weight Nasdaq”

  1. “…after Apple began its slide, and yet, still, it was almost 1/7th of the Qs…”

    BR,

    16.32% is almost 1/6th..(~14% would be ‘almost 1/7th’)

    Llama sin Cargo 800-SYN(TAX)-AIDE :)

    ~~~

    BR: Doh! I’ll fix above

  2. Frilton Miedman says:

    Another interesting play isolated to Q’s in tech, but also more evenly weighted is QTEC, allows holders to benefit regardless whom takes AAPL market share.

  3. kapil says:

    There is an ETF, QQEW that is just what you are looking for. As you would expect, it is outperforming this year, but when Apple was booming cap weighted did better.

  4. constantnormal says:

    Interesting, that there is not a larger difference between these two … looks to me that it amounts to about a 3% per year differential (over 8 years).

    My guess is that people are making too much out of AAPL as in individual stock … it is in reality an entire stock market ecosystem, with many other companies (which are also of a not-inconsequential size) being dependent on Apple as suppliers (and competitors — would there be an Android OS if there were no Apple?), and as Apple goes, so goes the NASDAQ.

    It probably has more to do with the “Apple ecosystem” that with just AAPL shares.

  5. constantnormal says:

    Let me put this another way … if Apple were a private, not a public company, you would still see a similar effect. It would still be driving the tech industry. Market cap is taken for more than it amounts to, it is only a measure of popularity among stockholders, a dependent variable, not an independent one.

  6. Petey Wheatstraw says:

    Can anyone point me to BR’s takedown of the meme that the CRA caused the housing bust?

    Thanks.

  7. Petey Wheatstraw says:

    Sorry, y’all, found it all.

  8. A says:

    First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW) ??

  9. eroldictat says:

    Equal weight will by necessity underperform a market weight over time. That’s because the framework you are using to analyze the problem is flawed in that it already contains information about who the winners are (at any given point in time). The APPLs and MSFTs of the world got to be so big in the index precisely because they are the Positive Black Swans and their businesses (and stocks) outperformed every other tech company (again, for now). So, if you systematically reweight an index to a random equal weight, all you are doing is trimming winners and reinvesting in losers (or at least companies that havent won yet). Good luck with that strategy.

    Hopefully you see my deeper point here. It is not that I believe it is a good thing for returns going forward that AAPL and GOOG and MSFT are so big. Indeed, there is an intuitive appeal to the idea that these companies are now too big to offer anything like their explosive growth of the past. BUT, AND HERE IS THE KICKER: if you apply a strategy that systematically controls for the biggest and most successful stocks from dominating an index, you will unwittingly prevent the next AAPL and GOOG and MSFT from running and bringing you windfall returns. Instead, your friendly ETF manager will be systematically selling the next AAPL, GOOG and MSFT for an equal weight of the next Pets.com, Blue Mountain and NCR. Not good.

    I believe the proper way to think about the equal weight exercise as an investor is to create an equal weight portfolio at a point in time and then come back to it in a a few years. This method respects the randomness of success and lets the winners emerge and losers fade. If this sounds unbearable, then forget the equal weight concept altogether and just revert to our standard market-weight world, which for its flaws, at least lets winners win.

    Credit for ideas: Taleb, Mandelbrot, et al.

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