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.