Can this ETF solve the ASX’s concentration problem?
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 62
Aussie investors have a problem.
Last month I discussed the fact that the ASX is one of the most concentrated share markets in the developed world. To paint a clearer picture, around 50% of each dollar you put in a broad market-cap ETF is going to the top ten companies in Australia. Whether this notion makes you uncomfortable will largely depend on the type of investor you are.
Whilst complaining about things is a rather cherished hobby of mine, I acknowledge it’s a bit like being that family member who goes on insane rants and then wanders off before anyone can ask questions. So today I am here to present a solution: the equal-weight ETF. This is a compromise that doesn’t involve stock-picking or abandoning the ASX entirely. But it is not without trade-offs.
How is an equal-weighted ETF any different?
Primary school pizza parties used to be a massive gripe of mine.
Some overworked teacher would catastrophically underestimate the ratio of children to pizza and the remaining pieces would always be reduced to microscopic slivers. An equal weighted fund is the financially literate version of fixing this injustice. Every company gets the same allocation regardless.
Childhood grudges aside, equal-weighting exists in opposition to the popular market-cap weighting approach which assigns underlying companies relative to their size. Bigger companies will have more representation in a fund that tracks a market-cap-weighted index.
Most people don’t see this as an issue in and of itself, however in certain dynamics it creates a portfolio that’s far more dependent on the fortunes of a small group of mega‑caps dominating the index.
Why choose equal weight ETFs?
There is meaningful academic support for equal weight compared to market cap weighted strategies. But for every one of these, there exists a counterpoint.
Of course, academic theory and reality can diverge, particularly in financial markets. If we look at the performance of VanEck’s Australian Equal Weight ETF MVW, it’s clear to see that the ‘equal weight outperforms’ narrative hasn’t played out across most periods.
Source: Morningstar. Category: Australia Fund Equity Australia Large Blend. Index: ASX 200.
We also see similar outcomes in the US market thanks to the recent mega-cap dominance. But past performance isn’t a perfect indicator of the future and I don’t believe miniscule long-term performance differences are a compelling reason to dismiss the approach altogether. The story could be very different depending on the period of data you examine. Equal weighting also isn’t necessarily a choice based solely on outperforming the market.
The ASX is one of the most concentrated developed markets in the world. The financials and materials sector together make up around 60% of the index. Given this, it’s natural some may look to an equal weight index for their broad Aussie equity exposure. Market-cap weighting and cashing in on the winners is all well and good when those dominant sectors are driving the market, but if and when that turns, concentration can become a vulnerability.
Equal weighting gives you a version of the Aussie market, but one that bears less concentration risk. By ascribing every company the same weight, the portfolio naturally spreads its exposure more broadly and partially reduces the level of focus in banks and miners.
For some investors, this broader diversification is the appeal of an equal weighted approach, as it softens the influence of ASX giants that trade at what may be deemed unreasonable valuations.
Investors may also be drawn to the income characteristics of an equal weight approach. Because the portfolio gives small and mid-sized companies a more meaningful presence, the distribution profile will likely look different from a traditional market‑cap ETF.
The trade-offs involved
Equal weighted ETFs need to rebalance periodically to maintain appropriate allocation to each constituent, whereas this isn’t required in market-cap ETFs.
This naturally results in a systematic way of enforcing the ‘buy low, sell high’ notion that trims winners which have increased in value whilst buying relative underperformers. Intuitively this sounds like the whole point of investing but there are several implications depending on what you’re trying to achieve in your portfolio.
Constantly changing an underlying portfolio to maintain equal weighting results in high turnover. Fund turnover indicates how much the holdings have changed over the course of the year. Fund turnover is the total value of securities the fund bought or sold (whichever is smaller), divided by the fund’s average assets over the year. The resulting percentage gives a sense of how much trading activity occurred within the fund overall.
For example, MVW ETF has a turnover ratio of around 36%, meaning it turned over the equivalent of one third of its portfolio during the year. But we don’t stress over high turnover just for the hell of it. We care because it can have a substantial impact on your outcomes.
Research from the Morningstar US team found that the performance picture wasn’t exactly flattering for high-turnover funds across the board. Those with the lowest turnover outperformed their average Morningstar Category peers by an average of ~2% annualised over the three years to 2025.
Beyond what the measure reveals about a fund’s investment strategy, there are also significant tax considerations. If a fund is mandated or chooses to sell investments in quick succession, there is a higher likelihood of capital gains being realised in the short-term, which means you don’t receive the 50% CGT discount. Under Australia’s trust structure for ETFs, those undiscounted gains are then passed on to investors through their distributions, meaning you effectively bear the tax outcome even though you didn’t personally sell anything.
Two funds with similar pre‑tax performance can deliver very different outcomes simply because one trades far more than the other. Fund turnover is also considered a proxy for trading costs. When a fund buys and sells it incurs the usual costs of brokerage and spreads. A high turnover ratio indicates that more trading is occurring and less of the gross potential return is making its way to investors. Even though these costs aren’t always explicitly itemised for investors, they do ultimately impact your return.
Beyond tax and costs, equal-weighted funds also naturally change the shape of the portfolio, creating differences that introduce what we refer to as active risk. This is the degree to which an ETF’s exposures deviate from the traditional market cap index.
If we look at MVW ETF again, by giving every company the same weight, it naturally results in less exposure to the sectors that dominate the ASX whilst the sectors that are normally overshadowed in a market cap‑weighted index receive a larger allocation. Real estate is a good example with MVW holding about 10% in real estate, compared with roughly 6% in the ASX 200.
Because you’re no longer mirroring the index on a market-cap-weighted basis, your returns will likely diverge depending on the relative performance of these sectors. This divergence introduces the active risk we discussed above. However, I will play devil’s advocate and note that picking an equal-weighted ETF doesn’t always imply you’re making a directional bet on sectors. Not only is it simply the consequences of the methodology itself, but also there can be other motivations such as income prospects or the desire to reduce concentration risk.
I recently did a full analysis on VanEck’s MVW ETF here.
