Equal weighting is also a play on the belief that the markets always revert to the mean, since when you’re rebalancing, you’re selling winners and buying losers.
Equal-weight isn’t just worth considering in periods of economic recovery. In the long run, mid- and small-caps tend to outperform the markets. This isn’t always true, however, though it’s a good reminder to see what size company the market climate favors. If it’s small caps, then consider an equal-weight ETF.
Equally Weighted ETFs
ETFs that equally weight their components simply give you more choices and creative ways to divvy up your clients’ assets. That said, there are some things to keep in mind before diving in.
Equal-weight ETFs are rebalanced quarterly. In this process, shares of stocks that did well in the quarter are sold while those that didn’t perform as well will be bought in order to bring the ETF back into balancing. This increased turnover results in higher trading costs than traditional market-cap weighted ETFs.
Equal-weight ETFs have a tendency to be more volatile than market-cap weighted funds. This is simply the nature of smaller companies and the greater weight they’re given: while small-caps are more nimble, they’re also generally more volatile.
Because small- and mid-caps are on equal footing with large-caps in equal-weighting strategies, such ETFs tend to lose value faster when the climate isn’t favorable for smaller companies.
To further research equal-weight ETFs, you can find all of them by visiting the ETF Analyzer and look under the hood in the ETF Resume. As a pro subscriber, be sure to take advantage of all the tools at your disposal: alerts will notify you of trading opportunities via email, while adding equal-weight ETFs to your watchlist will help keep you on top of what’s happening!
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.