The ASX-listed exchange-traded fund (ETF) VanEck Australian Equal Weight ETF (ASX: MVW) is an underrated pick, in my opinion, for investors wanting to passively invest in the overall ASX share market.

Aussies have solid ASX ETF choices, like the Vanguard Australian Shares Index ETF (ASX: VAS) or the BetaShares Australia 200 ETF (ASX: A200), which are understandably popular. These ETFs can provide exposure to 200 or 300 of the biggest businesses on the ASX for a very low cost.

However, while they own plenty of businesses, those ASX ETFs are weighted towards just two sectors: ASX bank shares and ASX mining shares.

On top of that, the major positions in the portfolio make up a lot of the overall portfolio. In the VAS ETF, just ten positions account for close to half of the overall portfolio value:

• BHP Group Ltd (ASX: BHP)
• Commonwealth Bank of Australia (ASX: CBA)
• CSL Ltd (ASX: CSL)
• National Australia Bank Ltd (ASX: NAB)
• Westpac Banking Corp (ASX: WBC)
• ANZ Group Holdings Ltd (ASX: ANZ)
• Macquarie Group Ltd (ASX: MQG)
• Wesfarmers Ltd (ASX: WES)
• Goodman Group (ASX: GMG)
• Rio Tinto Ltd (ASX: RIO)

So, what are Aussies meant to do if they want ASX share diversification but don't want heavy exposure to banks and miners? This is where the VanEck Australian Equal Weight ETF comes in.

Equal-weighted exposure

The MVW ETF invests in the largest Australian listed companies, but it's a portfolio with equal weighting across companies and reduced sector concentration.

It currently has 72 holdings. To be included in the portfolio, these companies must generate 50% of revenue (or have 50% of their assets) in Australia, have a market capitalisation of more than US$150 million, have a three-month average daily trading volume of at least US$1 million, and there must be at least 250,000 securities traded per month. In other words, it needs to have adequate liquidity – investors need to be able to trade it efficiently.  

It's rebalanced quarterly, so every three months, the ASX ETF's holdings are returned to the same allocation per stock.

All positions are equally as important, so I'll pick out some of the current largest and smallest positions in the portfolio as examples: Evolution Mining Ltd (ASX: EVN), South32 Ltd (ASX: S32), Pro Medicus Ltd (ASX: PME), Qantas Airways Limited (ASX: QAN), REA Group Ltd (ASX: REA), SEEK Ltd (ASX: SEK), Aristocrat Leisure Limited (ASX: ALL), Reece Ltd (ASX: REH), JB Hi-Fi Ltd (ASX: JBH) and Medibank Private Ltd (ASX: MPL).

Good dividends

Some investors may be concerned about missing out on the passive income from VAS ETF or A200 ETF. VanEck Australian Equal Weight ETF is an option for dividends, too.

Looking at the dividends paid over the prior 12 months, the MVW ETF had a dividend yield of 4.2% as at 30 September 2024, according to VanEck. The distributions from this ASX ETF are partially franked, so the grossed-up dividend yield is over 5%.

Reasonable fees

The VanEck Australian Equal Weight ETF has an annual management fee of 0.35%, which I think is fair. Investors are paying a little more for this fund than the A200 ETF or VAS ETF.

Returns

While improved diversification is the key goal, the MVW ETF has performed well for investors since its start on 4 March 2014, achieving an average annual return of 9.55%. That compares to an average annual return of 8.48% for the S&P/ASX 200 Index (ASX: XJO) over the same time period.

I think this equally-weighted fund makes a lot of sense as long as the ASX share market remains weighted to banks and miners.