The S&P 500, though, is weighted by market value, so the largest companies have the largest weight. There is an S&P 500 equal-weight index, which has proved much harder for active managers to beat over the long-term. The equal-weight index would rebalance holdings by selling outperformers and buy underperforming stocks. Additionally, due to the weighting methodology, an equal-weight index would tilt toward smaller companies, which have more room to run in the long-term
However, the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), the equal-weight answer to traditional S&P 500 ETFs, has dipped 3.8% year-to-date, underperforming the SPDR S&P 500 ETF (NYSEArca: SPY), which only fell 3.0% so far this year. Over the past 10 years, RSP has generated an average annualized return of 8.2% while SPY returned 7.1%. [Cap-Weighted ETFs are Trumping Equal-Weight Rivals This Year]
As the industry matures, there is a growing number of alternative indices, or what some have called “smart beta.” The indices are crafted to outperform traditional benchmarks by focusing on specific strategies or factors, like allocating toward cheap stocks or growing earnings, among others. [Rapid Growth in the Smart-Beta Index ETF Space]
For more information on ETF indices, visit our indexing category.
Max Chen contributed to this article.