Future Focus: 3 ETFs for Australian equity exposure
Weighting matters more than you think when it comes to diversification, performance and risk.
Mentioned: BHP Group Ltd (BHP), CSL Ltd (CSL), Goodman Group (GMG), Vanguard Australian Shares ETF (VAS), Vanguard MSCI Intl ETF (VGS)
You can own hundreds of Australian companies with one trade when you buy an ETF. This simple premise has led to widespread adoption by investors seeking simple, diversified portfolios. Buying an ETF cuts out the need to research individual stocks, decide how much to allocate to each one or worry about managing individual positions.
There is a catch - the number of companies in an ETF tells you surprisingly little about how diversified it actually is. What matters is how much of your money is invested in each company. Two ETFs can own many of the same companies and still give you very different portfolios depending on how they weight those holdings.
This is magnified in Australia, where the share market is dominated by a relatively small number of large banks and mining companies.
If you hold an Australian equity ETF, you’ve consciously or inadvertently made a choice.
There are three ways to weight the same market: market-cap weighting, equal weighting and fundamental weighting. All three can give you exposure to the Australian share market but result in markedly different portfolios.
I take a look at these three strategies and go under the hood of each – Vanguard Australian Shares Index ETF VAS, VanEck Australian Equal Weight ETF MVW and Betashares Australia 200 Fundamental Value ETF QOZ.
Market capitalisation
Market-cap weighting gives larger companies a higher allocation. This is how most broad-market Australian ETFs work and the premise is that size is a good indicator of value. The most popular ETF in Australia - Vanguard Australian Shares ETF VAS, for example, tracks the S&P/ASX 300, which is weighted according to the market value of its constituents. Your exposure to a company increases when its share price rises and its market capitalisation becomes larger.
This approach is simple and inexpensive. The implementation costs tend to be significantly lower than other approaches as it requires less portfolio management and generally incurs less transaction costs.
When we look under the hood of VAS, Financial Services makes up over 31% and Basical Materials makes up over 27% of the investment. The result is that owning an Australian broad-market ETF doesn’t mean you are spreading your money evenly across the Australian economy.
Investors should not conflate broad with diversified. There is a difference between the number of underlying holdings in an ETF and how much influence each has. An ETF like VAS can have 300 holdings while having a very large proportion of its assets concentrated in its largest holdings. Its top ten holdings represent 47% of the fund.
This isn’t an accident or a flaw in the index. Market-cap weighting is designed to represent the market as it exists. If CBA becomes more valuable, its weight increases. If BHP’s market capitalisation grows, your exposure to BHP increases.
That is precisely the appeal of market-cap indexing: it is transparent, rules-based and results in relatively little turnover. It also means the composition of your portfolio can change considerably without you making a single trade.
Equal weight
Equal weighting takes a very different approach. Instead of allowing the biggest companies to dominate, it gives each company roughly the same allocation.
The VanEck Australian Equal Weight ETF MVW is an example. Its underlying index equally weights its constituents, reducing the influence of the largest companies. In a market like Australia where we have a significant concentration to two industries, equal weighting tempers this exposure. It also reduces concentration in the largest companies – Australia’s two largest listed companies (BHP and CSL) make up over 20% of the ASX 300 (at 21 September 2026). The other 298 companies make up the other 80%.
An equal weighted ETF suits investors who are concerned about concentration in market capitalisation weighted indexes, or those that do not want oversized exposure to the largest companies that may be overvalued.
MVW generally holds around 70 to 100 companies, compared with 300 in an ASX 300 ETF. The investment evenly spreads the allocation across these companies, increasing exposure to medium-sized businesses.
Morningstar analysis has found that the average market capitalisation of MVW’s portfolio is less than half that of traditional market-cap-weighted Australian equity products. Its financials exposure is also materially lower than the ASX 300.
In other words, equal weighting doesn’t simply give you a more diversified version of exactly the same portfolio, it changes what you own.
The result is a portfolio that can behave quite differently from the market capitalisation weighted ETF.
There is another important consequence of the strategy. An equal-weighted ETF has to periodically rebalance to get back to its target weights. If a stock rises sharply, its allocation becomes larger than the target and the index sells some of it. If another stock falls, its allocation becomes smaller and the index buys more.
In other words, equal weighting systematically does something that market-cap weighting doesn’t: it sells relative winners and buys relative laggards.
That can create a value and size tilt over time, but it also means more trading. MVW, for example, has annual turnover of around 35% compared with the relatively low turnover typically associated with market-cap-weighted index strategies. Turnover can have implications for transaction costs and the capital gains distributed by a fund.
The additional work involved with the portfolio results in a more expensive product. In the case of MVW, it is 0.35% compared to an 0.07% p.a. management fee for the market capitalisation weighted Vanguard Australian Shares Index ETF VAS.
Overall, this looks not just like different exposure, but a different investment strategy.
Fundamental weighting
Fundamental weighting sits somewhere else again. Rather than weighting companies according to their share prices, it uses measures such as sales, cash flow, dividends and book value to determine their weight.
Betashares Australia 200 Fundamental Value ETF QOZ uses this approach. The methodology weights companies according to their fundamental size rather than their market capitalisation.
QOZ, for example, uses fundamental measures including sales, cash flow, dividends and book value to determine the size of its holdings. That breaks the direct relationship between a company’s share price and its weight in the portfolio. This can create a value-oriented portfolio because companies whose market prices have fallen relative to their fundamentals can receive a larger weighting.
Fundamental weighting can produce unusual exposures and unintended concentration. As at September 2026, for example, QOZ’s largest holding was BHP at 15.76%, compared with 11.78% in VAS.
Final thoughts
Australian equities exposure is almost always used as a core holding for investors over the long term. These ETFs offer three different exposures to the Australian market. Company concentrations, sector allocations, growth and value characteristics, tax implications and fees can differ greatly across the strategies. These differences can persist for years. This can result in very different outcomes for your portfolio.
It’s tempting to attempt to pick a winner, but investors need to consider what exposure best suits the goals of their portfolio.
Market-cap weighting has the advantage of simplicity and low cost. It lets the market determine the allocation and requires relatively little turnover.
Equal weighting reduces concentration in the largest companies but introduces greater exposure to smaller companies and requires regular rebalancing, which has its own tax and cost implications.
Fundamental weighting attempts to anchor allocations to measures of a company’s economic footprint rather than its market price but can produce substantial value and sector tilts.
Each approach will look better or worse depending on what is happening in the market. When you’re buying an ETF, you’re not just buying a collection of companies, but the strategy that determines how much of each company you own and your exposure over the long term.
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