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.
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.