Equal Weight Indexing

Equal weight exchange traded funds have outperformed the broader markets while providing investors with a diversified exposure that reduces risk of overconcentration to a single holding.

An equal weight strategy gives each stock in the index the same allocation – a mega giant such as Apple (NasdaqGS: AAPL) would have the same allocation as a company such as Oracle (NYSE: ORCL). This method allows investors to gain exposure to both smaller and larger companies, versus the traditional market-cap weighting where the largest companies comprise the biggest percentage of the portfolio.

“The best thing about this approach is that performance is not heavily dependent on the returns of a particular stock or group of securities. Furthermore, with quarterly rebalancing, equally-weighted funds tend to cash in on the overvalued segments and reinvest in the underperforming ones, potentially locking in gains from outperforming stocks,” Zacks Equity Research wrote. [ETF Index Changes Show Methodology Matters]

The Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP) gives about 0.2% to each stock in the index. RSP has returned 22.29% year-to-date. Over a trailing five year time frame, RSP has gained 69.7% versus 49.10% for the SPDR S&P 500 (NYSEArca: SPY). Sectors that are represented are consumer discretionary, financials, information technology, industrials and healthcare, respectively. [ETF Spotlight: Equal Weight S&P 500]

Another comparison is with the Guggenheim S&P Equal Weight Consumer Discretionary (NYSEArca: RCD). Each stock has 1.4% of the index with a focus on special retail, and smaller allocations to media and hotels. RCD is up 28% year-to-date, which has beat the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) by a long shot, reports Zacks. The consumer sector has rallied on strong, positive sentiment as the labor reports have come in with better numbers.

A drawback to the equal weight approach occurs if uptrends within one sector continues over many quarters. The equal weight approach can lag the broad market over such times. Experts also warn that in general, equal-weight ETFs tend to charge more than their market-cap weighted counterparts.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.