A white paper from Standard & Poor’s could have an effect on exchange traded funds (ETFs) that track equal-weighted indexes.

In markets where small-cap value is favored over large-cap growth, equal-weighted indexes outdo traditional cap-weighting, reports Jesse Emspak for Investor’s Business Daily. The study was conducted over the last five years.

The paper says the S&P 500 Equal Weight Index’s 5-year return was 15.9%, compared to the S&P 500 which returned 12.8%, through the end of 2007.  Over three years, however, the difference isn’t as noticeable. Equal weighted gained 8.3% vs. 8.6% for cap-weighted.

An equal-weighted index is exactly what its name implies – each stock in the index is weighted the same. A traditional index is market-cap weighted. In a boom period in one sector, an equal-weighted index won’t lift it as much, but a bust won’t drag it down so far.

Rydex S&P Equal Weight (RSP) is an ETF that uses the equally weighted method. Year-to-date, it’s down 1.6%. The provider has a line of other equal-weight ETFs, as well, that focus on various sectors.

There’s also the First Trust Nasdaq 100 Equal Weight Index (QQEW), which is down 4.7% year-to-date.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Tags: Sector ETFs