Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Equal Weight ETFs: Comparing Similar (But Different) Strategies

Mon, Dec 5, 9:14 AM ET, by Michael Johnston

In the universe of equity ETFs, market capitalization weighting strategies are incredibly dominant. The majority of the hundreds of domestic and international stock ETFs available to U.S. investors are linked to cap-weighted benchmarks, and the lion’s share of assets is in products that utilize this well known methodology. But in recent years, thanks in part to the ETF boom, alternative weighting methodologies have been gaining traction. For those seeking to steer clear of cap-weighting and all of its potential drawbacks, equal weighting has emerged as a popular alternative.

Part of the appeal of this approach may lie in the apparent simplicity; instead of giving the biggest allocations to the most valuable components of an index, equal weighting generally involves assigning an equivalent allocation to each security that meets the membership requirements for the benchmark. Breaking the link between stock price and index weight eliminates concerns that often are attached to cap-weighted ETFs, and the disciplined rebalancing that the equal weight approach forces can be an efficient way to reallocate holdings within a rules-based framework.

There are a number of equal-weighted ETFs now on the market, some of which have become tremendously popular. And while the general investment philosophy between these products is similar, there are some nuances that differentiate these products [for more ETF insights, sign up for the free ETFdb newsletter].

1. Equal Weighting Stocks

Many equal weight ETFs, including the $2.6 billion Rydex Equal Weight S&P ETF (RSP), simply assign equal allocations to each component security. For RSP, which holds the 500 stocks that make up the S&P 500, that means a weight of about 0.2% to every name in the index. For benchmarks with considerably more securities, the concentration can be even less significant; the MSCI Emerging Markets Equal Weight Index assigns a weighting of close to 0.1% to each of its component securities.

ETFs that implement this version of equal weighting strategy tend to have a heavier allocation in small cap and mid cap ETFs than their cap-weighted counterparts.

2. Equal Weighting Sectors

There is another twist on equal weighting that has made its way into the ETF wrapper: assigning equal weights to sectors of the economy. Many broad-based equity ETFs–both domestic and international–tend to maintain portfolios that are far from balanced from a sector perspective. Though the exact allocations can vary significantly, it is generally sectors such as energy, financials, and materials that receive the largest allocations while utilities, health care companies, and telecom stocks tend to be relatively underweighted.

The ALPS Equal Sector Weight ETF (EQL) takes a unique approach to domestic equity exposure; each of the nine major sectors of the U.S. economy receive an equivalent allocation. This approach might be appealing for a couple of reasons; it prevents establishing big allocation to sector-specific “bubbles” (a strategy that would have paid big dividends in the early 2000s) and also allows investors to participate in rallies in corners of the economy that are not always well represented in traditional equity products [see Time To Dump SPY?].

It should be noted that this version of equal weighting does not necessarily deliver equal weights at the individual stock level; because EQL’s holdings actually consist of sector SPDRs, this fund can be thought of as a blend between market cap weighting (at the individual stock level) and equal weighting (at the sector level).

1 + 2 = Rydex Russell ETFs

There are a couple of products on the market that combine both aspects of equal weighting, ensuring that investors achieve exposure that is balanced from a sector perspective while also avoiding concentrations in any individual components. A trio of Rydex ETFs linked to equal weight Russell indexes fit this description:

  • Rydex Russell 1000 Equal Weight ETF (EWRI)
  • Rydex Russell 2000 Equal Weight ETF (EWRS)
  • Rydex Russell Mid Cap Equal Weight ETF (EWRM)

Each of these three funds are linked to indexes that apply a multi-level equal weighting approach; the nine sectors are equal weighted, and then each stock within those sectors receives an equivalent weighting. So some stocks receive a larger allocation than others in different sectors, but both cap weighting and sector tilts are avoided entirely.

There is no universally superior methodology here; certain approaches will work well in certain environments, while others will end up being optimal in others. In some cases, simple cap weighting will beat all of the various forms of equal weighting; amidst the heightened volatility of recent months, the simple market capitalization weighting approaches have performed quite well. But the option to choose from these various techniques should be quite appealing to investors; the current lineup of ETFs allows for impressive precision even within specific asset classes.

Disclosure: No positions at time of writing.


SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "Sector" Definition
SDI Glossary: "Stock" Definition
This Article's Word Cloud:   ETFs   Equal   Many   Russell   Rydex   There   Weight   allocation   allocations   approach   between   both   domestic   each   economy   equal   equity   equivalent   from   have   index   individual   investors   level   linked   market   methodology   others   products   quite   receive   sector   sectors   some   stock   stocks   tend   that   these   this   various   version   weight   weighted   weighting   weights   well   while   will   within

| More

11.0% of DLN Holdings Seeing Recent Insider Buys
Mon, Jul 25, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the WisdomTree LargeCap Dividend Fund (DLN) shows ...

BANF Crosses Above Average Analyst Target
Mon, Jul 25, 8:24 AM ET, by ETF Channel

In recent trading, shares of BancFirst Corp. (BANF) have crossed above the average analyst 12-month ...

TIS Crosses Above Average Analyst Target
Mon, Jul 25, 8:24 AM ET, by ETF Channel

In recent trading, shares of Orchids Paper Products Co. (TIS) have crossed above the average ...

Chuy's Holdings Reaches Analyst Target Price
Mon, Jul 25, 8:24 AM ET, by ETF Channel

In recent trading, shares of Chuy's Holdings Inc (CHUY) have crossed above the average analyst ...

Cardtronics Reaches Analyst Target Price
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Cardtronics plc (CATM) have crossed above the average analyst 12-month ...

Marvell Technology Group Reaches Analyst Target Price
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Marvell Technology Group Ltd. (MRVL) have crossed above the average ...

WIN Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Windstream Holdings Inc (WIN) have crossed above the average analyst ...

NTAP Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of NetApp, Inc. (NTAP) have crossed above the average analyst 12-month ...

Sabra Health Care REIT Reaches Analyst Target Price
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Sabra Health Care REIT Inc (SBRA) have crossed above the ...

GNTX Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Gentex Corp. (GNTX) have crossed above the average analyst 12-month ...

CVLT Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of CommVault Systems Inc (CVLT) have crossed above the average analyst ...

DLTR Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Dollar Tree, Inc. (DLTR) have crossed above the average analyst ...

Washington Federal Reaches Analyst Target Price
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Washington Federal Inc. (WAFD) have crossed above the average analyst ...

CHFC Crosses Above Average Analyst Target
Mon, Jul 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Chemical Financial Corp (CHFC) have crossed above the average analyst ...

IWD, MRK, CSCO, MDT: ETF Outflow Alert
Fri, Jul 22, 10:59 AM ET, by ETF Channel

Symbols mentioned in this story: IWD, MRK, CSCO, MDT Exchange traded funds (ETFs) trade just ...

IWB, JNJ, JPM, HD: Large Inflows Detected at ETF
Fri, Jul 22, 10:59 AM ET, by ETF Channel

Symbols mentioned in this story: IWB, JNJ, JPM, HD Exchange traded funds (ETFs) trade just ...

MGLN Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Magellan Health Inc. (MGLN) have crossed above the average analyst ...

CPLA Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Capella Education Company (CPLA) have crossed above the average analyst ...

RLYP Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Relypsa, Inc (RLYP) have crossed above the average analyst 12-month ...

QCOM Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Qualcomm, Inc. (QCOM) have crossed above the average analyst 12-month ...

OUTR Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Outerwall Inc (OUTR) have crossed above the average analyst 12-month ...

UTEK Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Ultratech Inc (UTEK) have crossed above the average analyst 12-month ...

INFO Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of IHS Markit Ltd (INFO) have crossed above the average analyst ...

ABY Crosses Above Average Analyst Target
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Atlantica Yield plc (ABY) have crossed above the average analyst ...

eBay Reaches Analyst Target Price
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of eBay Inc. (EBAY) have crossed above the average analyst 12-month ...

Sanderson Farms Reaches Analyst Target Price
Fri, Jul 22, 8:19 AM ET, by ETF Channel

In recent trading, shares of Sanderson Farms Inc (SAFM) have crossed above the average analyst ...

PG&E Moves Up In Analyst Rankings, Passing American Electric Power Company
Thu, Jul 21, 11:49 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

PFF, WFC, HSBC, DB: Large Inflows Detected at ETF
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: PFF, WFC, HSBC, DB Exchange traded funds (ETFs) trade just ...

MDY, MTD, WWAV, INGR: ETF Inflow Alert
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: MDY, MTD, WWAV, INGR Exchange traded funds (ETFs) trade just ...

IVV, GE, AMZN, FB: Large Inflows Detected at ETF
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: IVV, GE, AMZN, FB Exchange traded funds (ETFs) trade just ...

PRFZ, EZPW, GOV, SEIC: ETF Inflow Alert
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: PRFZ, EZPW, GOV, SEIC Exchange traded funds (ETFs) trade just ...

IYR, AMT, PSA, CCI: Large Inflows Detected at ETF
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: IYR, AMT, PSA, CCI Exchange traded funds (ETFs) trade just ...

VOO: ETF Inflow Alert
Thu, Jul 21, 10:49 AM ET, by ETF Channel

Symbols mentioned in this story: VOO Exchange traded funds (ETFs) trade just like stocks, but ...

Mobile Mini Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Mobile Mini, Inc. (MINI) have crossed above the average analyst ...

MCHP Crosses Above Average Analyst Target
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Microchip Technology Inc (MCHP) have crossed above the average analyst ...

Cisco Systems Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Cisco Systems, Inc. (CSCO) have crossed above the average analyst ...

TWOU Crosses Above Average Analyst Target
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of 2U Inc (TWOU) have crossed above the average analyst 12-month ...

PCTY Crosses Above Average Analyst Target
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Paylocity Holding Corp (PCTY) have crossed above the average analyst ...

Big 5 Sporting Goods Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Big 5 Sporting Goods Corp (BGFV) have crossed above the ...

OMAB Crosses Above Average Analyst Target
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) have ...

Ligand Pharmaceuticals Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Ligand Pharmaceuticals Inc (LGND) have crossed above the average analyst ...

MKS Instruments Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of MKS Instruments Inc (MKSI) have crossed above the average analyst ...

Analog Devices Reaches Analyst Target Price
Thu, Jul 21, 9:59 AM ET, by ETF Channel

In recent trading, shares of Analog Devices, Inc. (ADI) have crossed above the average analyst ...

AptarGroup Reaches Analyst Target Price
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of AptarGroup Inc. (ATR) have crossed above the average analyst 12-month ...

Halyard Health Reaches Analyst Target Price
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of Halyard Health Inc (HYH) have crossed above the average analyst ...

PRTY Crosses Above Average Analyst Target
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of Party City Holdco Inc (PRTY) have crossed above the average ...

Maxim Integrated Products Reaches Analyst Target Price
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of Maxim Integrated Products, Inc. (MXIM) have crossed above the average ...

Zumiez Reaches Analyst Target Price
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of Zumiez Inc (ZUMZ) have crossed above the average analyst 12-month ...

Quotient Technology Reaches Analyst Target Price
Thu, Jul 21, 9:49 AM ET, by ETF Channel

In recent trading, shares of Quotient Technology Inc (QUOT) have crossed above the average analyst ...

FBHS Crosses Above Average Analyst Target
Thu, Jul 21, 9:39 AM ET, by ETF Channel

In recent trading, shares of Fortune Brands Home & Security, Inc. (FBHS) have crossed above ...

  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

Equal Weight ETFs: Comparing Similar (But Different) Strategies | Self Directed Investor | Copyright © 2008 - 2016, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of serious individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.