Michael Rawson for Morningstar reports that there are three potential sources of extra return from an equal weight index. There is a small size tilt from under-weighting mega-cap stocks and over-weighting smaller stocks. Also, there is a value angle from under-weighting overpriced glamor stocks. The third potential source of return is from contrarian re-balancing. In order to maintain equal weightings, the index must sell stocks that have recently appreciated and buy stocks that have recently declined. [ETFs Drive Innovation in Index Construction]

Overall, an equal weight index is known to perform better when the market favors small or mid-cap stocks. An equal weight index also avoids excessive valuations, when the market is driven by momentum.

Equal Weight ETFs:

  • Guggenheim S&P Equal Weight ETF (NYSEArca: RSP)
  • Guggenheim S&P EQual Weight Technology (NYSEArca: RYT)
  • First Trust NASDAQ 100 Equal Weight Index Fund (NYSEArca: QQEW)

Tisha Guerrero contributed to this article.

Read the disclaimer; Tom Lydon is a board member of the funds for Guggenheim Investments.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.