Exchange-traded funds (ETFs) that hold investments using an equal-weight method are posting weaker performance than market-cap-weighted ETFs. That is because in both the U.S. and Korean stock markets, a handful of large-cap stocks continue to drive the rally.
According to Koscom ETF Check on Oct. 21, the net worth of Mirae Asset Global Investments' TIGER S&P 500 Equal Weight ETF fell by 93.5 billion won this year (Jan. 2–Oct. 17). Among equity ETFs, it recorded the sixth-largest outflow.
Even though the U.S. Standard & Poor's (S&P) 500 Index rose this year, a large outflow hit the ETF tracking the index because its return was relatively weak. The S&P 500 has gained 13.6% this year, topping 6,600 for the first time, but the year-to-date share price increase of TIGER S&P 500 Equal Weight is only 3.7%.
The inclusion ratio of components dragged down the ETF's return. Equal-weight ETFs set similar weights for each constituent. For example, within the S&P 500, the market-cap-weighted allocations for Nvidia, the No. 1 by market cap, and News Corporation (Class B), No. 500, are 7.4% and 0.01%, about a 740-fold gap. But within TIGER S&P 500 Equal Weight, they are 0.2% and 0.05%, a gap of about fourfold.
Recently, the S&P 500 has risen around top market-cap names. ▲Nvidia 32.5% ▲Microsoft 22.7% ▲Meta Platforms 19.6% ▲Broadcom 50.6% ▲Alphabet (Google) 33.1% are representative. By contrast, lower market-cap constituents in the S&P 500 saw weaker share prices: ▲News Corporation -2.8% ▲CarMax -47.2% ▲Eastman Chemical -30.8% ▲Henry Schein -8.1% ▲LKQ Corporation -17.1%.
As a result, equal-weight ETFs held less of stocks with higher share-price gains and more of those with lower gains.
Equal-weight ETFs focus on diversifying risk from concentration in specific stocks, but their defensiveness also showed limits. From April 2 to 8, when the market plunged after U.S. President Donald Trump's tariff announcement, the S&P 500 fell 12.1%, and TIGER S&P 500 Equal Weight also dropped 8%.
ETFs tracking Korean indexes show a similar picture. While the KOSPI 200's year-to-date gain exceeds 65%, the same-period share price increase of Samsung Asset Management's KODEX 200 Equal Weight, which follows it using an equal-weight method, is below 40%.
For the KOSPI 200 as well, the gains have been driven notably by two stocks, Samsung Electronics and SK hynix, which are only limitedly reflected in the equal-weight method. Narrowing to the most recent three months, the KOSPI 200 jumped more than 21% while KODEX 200 Equal Weight rose only 1%.
With funds crowding into the artificial intelligence (AI) theme, equal-weight ETFs are unlikely to shake off their slump easily.
An analyst in charge of market commentary at a domestic securities firm said, "In a broad-based bull market rather than a stock picker's market, the equal-weight method is inevitably disadvantaged," and noted, "In terms of earnings per share (EPS) growth, the top market-cap constituents of the S&P 500 are ahead of the lower-tier names."