Investors looking for strong returns with an ETF that tracks the ASX 200 could consider a uniquely weighted fund.
Investing in an ETF tracking the S&P/ASX 200 Index (ASX: XJO) can be a 'set and forget' opportunity with diversification.
But not all ETFs are created equal — literally. There are multiple ETFs that track the performance of the ASX 200 in different ways. Digging a little deeper to understand what you're buying is important.
Traditional "market cap" ETFs
Many ETFs use market capitalisation to weigh their holdings.
For example, the iShares Core S&P/ASX 200 ETF (ASX: IOZ) is designed to measure the performance of the 200 largest Australian securities listed on the ASX.
This fund measures the "largest securities" by float-adjusted market capitalisation.
"Float-adjusted" capitalisation attempts to more accurately measure a company's market value compared to market cap. It only considers the shares available for public trading rather than all outstanding shares.
So, how does this shake out in terms of its holdings?
iShares Core ASX 200 top 10 holdings
Commonwealth Bank of Australia (ASX: CBA): 10.53%
BHP Group Ltd (ASX: BHP): 8.16%
CSL Ltd (ASX: CSL): 5.41%
National Australia Bank Ltd (ASX: NAB): 4.78%
Westpac Banking Corporation (ASX: WBC): 4.58%
ANZ Group Holdings Ltd (ASX: ANZ): 3.71%
Macquarie Group Ltd (ASX: MQG): 3.25%
Wesfarmers Ltd (ASX: WES): 3.23%
Goodman Group (ASX: GMG): 2.63%
Woodside Energy Group Ltd (ASX: WDS): 1.85%
These top 10 holdings and their weighting are almost identical for similar ETFs, such as the BetaShares Australia 200 ETF (ASX: A200) and the Vanguard Australian Shares Index ETF (ASX: VAS), which tracks the ASX300.
Over the last 10 years, the iShares Core ASX 200 ETF has delivered an average return per annum of 8.9%.
BetaShares FTSE RAFI Australia 200 ETF (ASX: QOZ)
However, I am more bullish on another ETF that tracks the ASX 200: the BetaShares FTSE RAFI Australia 200 ETF (ASX:QOZ). This fund uses a different weighting strategy than market cap.
The ETF aims to provide exposure to a diversified portfolio of Australian equities, weighted to reflect economic importance rather than market capitalisation.
When looking at its holdings, you can see it has a different breakdown compared to similar ETFs like the iShares, BetaShares, and Vanguard market cap-weighted variants.
BetaShares FTSE RAFI Australia 200 top 10 holdings
BHP Group Ltd: 10.8%
Commonwealth Bank of Australia: 9.1%
Westpac Banking Corp: 6.8%
National Australia Bank Ltd: 5.5%
ANZ Group Holdings Ltd: 5.0%
Macquarie Group Ltd: 3.1%
Rio Tinto Ltd (ASX: RIO): 2.9%
Wesfarmers Ltd: 2.6%
Woodside Energy Group Ltd: 2.3%
Woolworths Group Ltd (ASX: WOW): 2.2%
Most importantly, the BetaShares FTSE RAFI Australia 200 ETF has outperformed the three market cap-weighted options on a per-annum basis over the last ten years.
Since its inception in July 2013, the 'fundamentally weighted' ETF has delivered an average annual return of 9.40%, slightly ahead of ASX200 tracking ETFs that weight their portfolios based on market cap.
According to the fund, this is its specific goal. It aims to deliver outperformance compared to products based on market-cap-weighted indices by selling expensive shares while buying undervalued ones.
By removing the link between a company's size and its weight in the index, the BetaShares RAFI Australia ETF strategy is expected to be less affected by fads and bubbles.
For investors looking for an ASX 200 index-tracking ETF with a point of difference and strong returns, the lesser-known ETF has shown it can outperform some of the larger market-cap-weighted funds.
It's important to note that the BetaShares FTSE RAFI Australia 200 ETF has higher fees of 0.40% p.a compared to the more traditionally weighted ETFs.
