The equal-weighted indexing strategy is a simple alternative to market-cap weighted indices and can be a good way to gain a tactical position within a portfolio. The equal weight strategy can be used in exchange traded funds and gives each stock the same weighting within the portfolio.
“Exchange-traded funds are often used to make short term, tactical bets on certain sectors. In this case, you want exposure to an entire industry, not just to a handful of mega-cap stocks. Equal-weighted sector funds, such as Guggenheim S&P 500 Equal Weight Energy (NYSEArca: RYE) may make more sense when seeking industry exposure,” Michael Rawson wrote in a recent Morningstar article. [How Equal Weight ETFs Can Protect a Portfolio]
The equal weighting strategy gives both small and large-caps an equal-weighting within an index fund or portfolio. This allows all of the companies to be considered on an even playing field. Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds and, as a result, they usually have higher trading costs, reports Investopedia. [ETFs and Indexing: What’s Your Style?]
An equal weighted methodology is considered an alternative form of indexing, with the basic market-cap weighted index being the most common. There are risks associated with equal weighting, such as the potential for concentration in a handful of stocks within sector funds. Additionally, equal weighted ETFs are intended for use as a tactical holding, rather than used as a core holding within a portfolio. [What is an ETF? – Part 2: Indexing]