ETF Nasdaq 100 Index – Commentary - October -2023
After a rally in equities failed to move major indices above recent highs, equities finished the month of October in the red.
November 9, 2023
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Harness Nasdaq 100 innovation with an equal weight overlay
Why is this unique combination a game-changer?
Are you seeking a cutting-edge investment opportunity that maximizes your exposure to innovation while maintaining a balanced portfolio? We help investors stay at the forefront of innovation whilst also mitigating risk by offering Nasdaq 100 exposure with an equal weight approach.
By combining the Nasdaq 100 Index and equal weight, investors could benefit from the synergy of two powerful investment approaches.
Dynamic pairing
The Nasdaq 100 Index captures the potential of high-growth, innovative companies, while equal weight adds an element of diversification and risk management. This dynamic pairing aims to enhance both upside potential and downside protection.
Balanced approach
During periods when a few mega-cap stocks may dominate the market, equal weight rebalances the portfolio, ensuring that smaller companies have a significant impact on overall performance. This balanced approach safeguards against potential concentration risks, maximizes opportunities, and aims to deliver superior risk-adjusted returns over the long run.
Compelling investment proposition
Accessing wise innovation through investing in the Nasdaq 100 Index and incorporating risk management with an equal weight approach offers a compelling investment proposition.
Unlock the power of innovation
The combination allows investors to capture the growth potential of innovation powerhouses while mitigating risk through diversification. By embracing this unique synergy, investors could leverage transformative trends, enhance long-term performance, and unlock the power of wise innovation in their investment journeys.
Nasdaq 100: Innovation without concentration
Nasdaq 100: Embrace innovation giants
The Nasdaq 100 Index provides investors with unparalleled access to the companies driving technological advancements and pushing the boundaries of innovation. It consists of the top 100 non-financial companies listed on the Nasdaq stock exchange, encompassing industry leaders in technology, healthcare, communications, and more. By investing in it, investors could tap into the growth potential of global innovation powerhouses such as Apple, Microsoft, Amazon, Google, and Facebook, and more importantly, position themselves at the forefront of transformative trends and disruptive technologies that shape our world.
More than just a technology story
GICS reclassification of IT in Sep 2018 moved companies into Consumer Discretionary and Communication Services sectors and IT was reduced to roughly half the index. The Nasdaq 100 index has now become the tool to capture innovative companies across various sectors and industries, which may better enable investors to gain access to diversification benefits and growth potential for their portfolios through investing in innovation.
Sector allocation of Nasdaq 100 Index
Source: Bloomberg, as of last rebalance, 19 Sep 2022.
How could Nasdaq 100 exposure fit into your portfolio?
Large-Cap stocks tend to be the largest portion of many portfolios and have played an important role in providing potential growth to a portfolio comprised of stocks, bonds, and alternatives. What we have seen over the previous 20 years is that Large-Cap companies have been a primary driver of a portfolio’s returns.
There are many reasons investors may have chosen the Nasdaq 100 Index to represent their Large-Cap and Large-Cap Growth exposure. The companies within the Nasdaq 100 Index have shown higher levels of historic growth rates of fundamental metrics such as revenue, earnings, and dividends when compared to other indexes.
Large-Cap Growth can be an important part of a diversified portfolio. The Index has continued to be one of the leaders in this category and has given investors access to innovative companies that have grown revenue, earnings and dividends at a faster rate than the broader market. For investors looking for exposure within the large-cap growth segment of the market, the Nasdaq 100 Index should be considered.
Explore opportunities on Nasdaq 100
Equal weight: a solution for portfolio diversification
Why incorporate equal weight in investment portfolios?
Diversifcation method
While the Nasdaq 100 Index offers exposure to innovation giants, it is also essential to maintain a balanced portfolio. This is where equal weight comes into play as a diversification method. Unlike traditional market-weighted ETFs, an equal weight ETF allocates an equal amount of investment to each constituent stock, regardless of its market capitalization.
Equal investment
As of the end of August, 8 out of the top 10 stocks in S&P 500 index are overlap with Nasdaq 100 index with an aggregated weighting of roughly 30%*. By investing in an equal weight ETF alongside the Nasdaq 100 Index, investors could ensure that their portfolios are not overly concentrated in a few dominant stocks. (*Source: Bloomberg, 31 August 2023)
Risk resilience
One of the biggest problems with investing in a market weighted index is that investors are typically putting the most money (or highest weight) into companies that have already outperformed the rest of the market. With so many twists and turns in markets, to diversify risks from investing in technology companies, investors are also considering equal-weighted indices such as the S&P 500 Equal Weight Index as an alternative to traditional market capitalization-weighted indices like the S&P 500 Index, as they offer greater risk resilience and diversification.
Long-term stability
This diversification strategy reduces single-stock risk and provides a more balanced exposure across the entire index, unlocking the potential for long-term stability and consistent returns. Now it might be an opportunity to capture the long-term risk adjusted returns of an equal weight strategy.
Why use equal weight to diversify your investment portfolios?
Equal Weight’s simple and effective methodology removes concentration risk from the S&P 500 Index
Equal Weight’s more balanced sector exposure with historical long-term outperformance over traditional US large-cap allocation
Equal Weight’s systematic rebalancing schedule captures “buy low, sell high” advantage. At rebalance, the index trims exposure to stocks that performed well during the quarter (sell high) and increases exposure to stocks that underperformed (buy low).
Greater diversification across the universe: equal weightings in index only impacted by market moves between rebalances
Source: Bloomberg, as of 30 Dec 2022. The top 50 companies in the S&P 500 and S&P 500 Equal weight account for 51% and 11% of the respective total index weight.
How does the diversification work?
1. Equal weight gives more balanced sector exposure:
Source: S&P as of 30 June 2023. Data for the S&P 500 Equal Weight Index represent actual index constituent data from June 2003 through 31 Dec 2021. Prior to June 2003, the data was compiled by Invesco and represents the constituents of the S&P 500 Index, given an equal weight at each quarter end, and allowed to float in between quarters based on their stock price movements.
2. Equal weight reduces concentration in technology
Source: Bloomberg, as at 31 Aug 2023.
3. Equal weight typically offers more exposure to better-performing stocks
Source: S&P Dow Jones Indices LLC. FactSet. Data from March 31 2003 to Dec 30 2022. Chart shows the average annual contribution of stocks across performance declines to the S&P 500 Equal Weight Index. Chart is provided for illustrative purposes. Past performance is not a guide to future returns.
4. Reducing exposure to the largest stocks helps drive outperformance
Equal Weight reduces weight to largest stocks
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Equal Weight seeks enhanced return potential while targeting similar risk/reward trade-off to S&P 500 Index
Equal Weight is less sensitive to performance of larger names
More Equal than Others: 20 Years of the S&P 500 Equal Weight Index
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Why innovate wisely with Invesco ETFs?
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1. Invesco, 30 June 2023
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