ETFs 101: A Look at Indexing Methodologies

However, this methodology is heavily influenced by its top 10 holdings, which may make it more vulnerable to a market crash. Still, this is may be a boon when larger companies are outperforming the markets or during momentum driven market conditions.

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.