After a volatile start to 2025, ASX ETF investors may be considering how to best position their portfolio for the remainder of the year.
The majority of ASX index exchange traded funds (ETFs) are capitalisation weighted. This means their weightings match the indices they aim to replicate.
For example, Betashares Australia 200 ETF (ASX: A200), which aims to replicate the S&P/ASX 200 Index (ASX: XJO), is heavily concentrated in the banking and mining sectors. As of 2 May 2025, its top 5 holdings are Commonwealth Bank of Australia (ASX: CBA) (11.5%), BHP Group (ASX: BHP) (7.5%), CSL Ltd (ASX: CSL) (5.1%), Westpac Banking Corp (ASX: WBC) (4.8%) and National Australia Bank (ASX: NAB) (4.6%).
While A200 had a strong past month, rising 7.5%, forward returns could be less impressive.
This is mainly due to the valuation of the banking sector.
Last week, The Motley Fool's Bronwyn Allen covered Macquarie's view that the big 4 banks are on 'borrowed time'. According to Macquarie, ASX bank shares have outperformed recently due to investors viewing them as safe haven investments. However, rate cuts, weaker consumer demand, and global volatility may negatively impact profitability and reduce returns on equity (ROE).
Macquarie had flagged CBA shares as particularly overvalued. CBA shares are currently trading on a price-to-earnings ratio (PE) of 28x compared to Westpac 17x, NAB 16x, and ANZ 14x.
Other popular capitalisation weighted ASX ETFs, such as Vanguard Australian Shares Index ETF (ASX: VAS), also have large allocations to the banking sector.
As a result, investors may be looking to invest in diversified ASX ETFs with lower banking exposure.
VanEck Australian Equal Weight ETF (ASX: MVW)
VanEck Australian Equal Weight ETF could be a great option for investors to consider today. It is sufficiently diversified, containing 74 of Australia's largest and most liquid companies. Its management fee is modest at 0.35%, and it pays a distribution semi-annually.
As the name suggests, its allocations are equally weighted. This means that, while it does hold the big 4 banks, they are weighted the same as the 70 other holdings. Should the banking sector experience a sell off, MVW ETF will be significantly less affected than capitalisation weighted ETFs such as A200 ETF.
Foolish Takeaway
For the year to date, MVW has outperformed the S&P/ASX 200 Index. It has risen 2.7% compared to the index, which is up just 0.5%. Over a 5 year period, it is (only just) behind, returning 52.7% compared to 52.8% for the index. However, MVW ETF could be primed for sizeable outperformance in 2025, with banking sector valuations looking especially steep.
