The biggest ETFs have been getting all the attention over the years as investors grouped into these traditional market capitalization-weighted plays, but the ones tracking an equal-weight indexing methodology have been quietly outperforming all along.
The biggest and most popular ETFs on the market largely include those that track traditional market capitalization-weighting methodologies, or they weight component stocks based on the companies’ market capitalization, so bigger companies have a greater say in the direction of the overall ETF’s performance.
In contrast, an equal-weighted indexing, like its naming suggests, would equally distribute the weight among all company holdings within the index, regardless of the market cap of each company.
Pablo Fernandez, a finance professor at the University of Navarra, pointed out that by treating all companies equally in terms of how they can influence the whole group, the equal-weighted indexing methodology has provided a better return to investors over the past two decades, CNBC reports.