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.