The equal weighting methodology tries to balance out the top heavy nature of market-cap weighted indices, equalizing the weightings on all component holdings. Consequently, mid- and small-cap stocks have a greater say in the fund, which help drive equal-weighted ETF performances during the initial stages of a market recovery. Additionally, historical evidence has shown that over the long run, mid- and small-cap companies tend to perform better over extended periods.

However, equal-weight ETFs will have to rebalance more frequently to achieve its target objective, which may increase the costs of holding the funds.

[What is an ETF?–Part 1: The Basics]

[What is an ETF?–Part 3: Enhanced Indexing]

Max Chen contributed to this article.

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