For much of this year, the Nasdaq-100 Index (NDX), bolstered by the likes of Apple, Inc. AAPL, and Amazon.com, Inc. AMZN, has been a hot, beloved index.

What Happened

The traditional Nasdaq-100, the one most investors follow, is cap-weighted, meaning Apple, Microsoft Corporation MSFT, and other revered growth names take on out-sized portions of the benchmark.

That's great on the way up, but some investors may look to defray that concentration risk with the Direxion NASDAQ-100 Equal Weighted Index Shares QQQE. QQQE, which is one of the largest non-leveraged of exchange-traded funds in the Direxion stable, tracks the NASDAQ-100 Equal Weighted TR Index (NDXE).

Why It's Important

“Because NDX is a modified market-cap-weighted index, it essentially 'doubles down' on its best-performing constituents,” according to Nasdaq Global Indexes. “Over the past decade, this has been a good thing for investors, as large-cap Tech has trounced most other corners of the public equity markets.”

As noted above, the NDX methodology is great when names like Amazon, Apple, and Microsoft, among others, are firing on all cylinders. However, NDXE, the equal-weight benchmark, offers investors the dual benefit of reduced concentration risk and increased exposure to smaller stocks.

“While not proven to be always superior from a return or risk perspective, NDXE offers investors the benefit of maintaining stable, 1%-each weightings to all 100 of NDX’s companies, rebalanced quarterly (as opposed to NDX’s annual rebalancing schedule),” according to Nasdaq. “This means that, instead of allocating more than half its weight to the top 10 constituents, NDXE allocates only 10%. It also means that, on a sector level, weights are more diversified and less concentrated in Technology.”

What's Next

Currently, QQQE is 673 basis points underweight tech and 603 basis underweight communication services relative to the cap-weighted NDX. The ETF's noticeable overweights are healthcare (753 basis points) and industrials (just over 5%).

Additionally, QQQE's underlying index is showing some benefits this year compared to the S&P 500 Equal Weight Index.

“But in 2020 in particular, the more interesting story is the volatility differential between NDXE and SPW (the equal-weighted S&P 500 Index),” notes Nasdaq. “Despite historically registering generally lower volatility than NDXE, SPW has experienced annualized daily volatility of 46.9% thus far in 2020, vs. only 42.2% for NDXE. This is despite having exposure to more sectors generally, and 5 times as many constituents.”