The Lure of Apple Inc. (AAPL)-Light ETFs

A better alternative?
Interestingly, because equal-weight S&P 500 funds take away the vast majority of the weighting from the component stocks with the largest market caps, they tend to perform in line with mid-cap funds that only include stocks of similar size to the smallest stocks in the S&P 500. In fact, if you look at the returns for the S&P Mid-Cap 400 ETF over the same 10- to 15-year time frame, you’ll find that it outperforms the S&P 500 by an even larger margin than equal-weight funds. Yet as a Zacks report cited in Barron’s noted recently, you’ll end up paying a lot more in expenses for the typical equal-weight fund.

Why that is is a completely mystery. There couldn’t be anything easier than buying equal amounts of 500 different stocks, yet for some reason, equal-weight ETFs charge four to eight times what you’ll pay for the cheapest S&P 500-tracking index ETFs. Yet until a low-priced ETF provider comes out with an equal-weight option, you’ll be better off sticking with a mix of cheaper ETFs, with one covering large caps and others covering mid-cap and small-cap stocks.

Keeping your eyes on the prize
Despite their long-term outperformance, equal-weight ETFs are subject to the same cycles that dominate financial markets generally. They move in and out of favor compared to market-cap-weighted ETFs, sometimes outperforming, sometimes underperforming. Apple Inc. (NASDAQ:AAPL)s influence has helped equal-weight ETFs lately, but that’s not cause to abandon market-cap weighting entirely. No matter what ETF you pick, the key is for it to give you the stock exposure you want at a reasonably low price.

The article The Lure of Apple-Light ETFs originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Apple. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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