Some exchange traded funds (ETFs) are being rolled out based upon equal weight rather than market capitalization. XShares Advisors recently launched a set of REIT ETFs that are equal weighted, and Rydex also has done so in recent years with the Rydex S&P Equal Weight (RSP).

Market-cap weighting is the traditional method for the S&P 500, and most ETFs are still weighted in this way. Jesse Emspak for Investor’s Business Daily says with equal weighting, a 1% rise or fall in one security’s price has the same impact on the index’s performance as another. This is not the case for market cap-weighted indexes. Because all stocks do not perform the same, re-balancing is needed periodically to put the weightings back in sync. Equal-weighted indexes are likely to outperform when small stocks do better than larger ones. This also seems to work in favor for single sector exposure.

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

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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