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

EWS Crosses Critical Technical Indicator
Fri, Jul 31, 4:24 PM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Singapore ETF (EWS) entered into oversold ...

CMDT Crosses Critical Technical Indicator
Fri, Jul 31, 4:24 PM ET, by ETF Channel

In trading on Friday, shares of the iShares Commodity Optimized Trust ETF (CMDT) entered into ...

COMT Crosses Critical Technical Indicator
Fri, Jul 31, 4:24 PM ET, by ETF Channel

In trading on Friday, shares of the iShares Commodities Select Strategy ETF (COMT) entered into ...

FMF Crosses Above Key Moving Average Level
Fri, Jul 31, 4:24 PM ET, by ETF Channel

In trading on Friday, shares of the First Trust Morningstar Managed Futures Strategy Fund ETF ...

CGW Crosses Above Key Moving Average Level
Fri, Jul 31, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Guggenheim S&P Global Water Index ETF (CGW) crossed ...

VGIT Crosses Above Key Moving Average Level
Fri, Jul 31, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Vanguard Intermediate-Term Government Bond ETF (VGIT) crossed above ...

Vanguard Short-Term Bond (BSV) Shares Cross Above 200 DMA
Fri, Jul 31, 10:54 AM ET, by ETF Channel

In trading on Friday, shares of the Vanguard Short-Term Bond ETF (BSV) crossed above their ...

TYD Makes Bullish Cross Above Critical Moving Average
Fri, Jul 31, 10:54 AM ET, by ETF Channel

In trading on Friday, shares of the Daily 7-10 Year Treasury Bull 3x Shares ETF ...

DBO Crowded With Sellers
Fri, Jul 31, 10:54 AM ET, by ETF Channel

In trading on Friday, shares of the PowerShares DB Oil Fund ETF (DBO) entered into ...

VDE, COP, OXY, PSX: ETF Outflow Alert
Fri, Jul 31, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VDE, COP, OXY, PSX Exchange traded funds (ETFs) trade just ...

AOR Crosses Above Key Moving Average Level
Fri, Jul 31, 10:54 AM ET, by ETF Channel

In trading on Friday, shares of the iShares Core Growth Allocation ETF (AOR) crossed above ...

CIU: ETF Outflow Alert
Fri, Jul 31, 10:54 AM ET, by ETF Channel

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

RWX, BAM.A.CA, REI.UN.CA, HR.UN.CA: ETF Inflow Alert
Fri, Jul 31, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: RWX, BAM.A.CA, REI.UN.CA, HR.UN.CA Exchange traded funds (ETFs) trade just ...

15.2% of FRI Holdings Seeing Recent Insider Buys
Fri, Jul 31, 9:34 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust S&P REIT Index Fund ...

HCP Named A Top Socially Responsible Dividend Stock
Fri, Jul 31, 8:14 AM ET, by ETF Channel

HCP, Inc. (HCP) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

BRXX Crowded With Sellers
Thu, Jul 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the EGShares Brazil Infrastructure ETF (BRXX) entered into oversold ...

IDX Crosses Critical Technical Indicator
Thu, Jul 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the Indonesia Index ETF (IDX) entered into oversold territory, ...

Shares of DBE Now Oversold
Thu, Jul 30, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the PowerShares DB Energy Fund ETF (DBE) entered into ...

Ecolab Achieves #61 Analyst Rank, Surpassing TE Connectivity
Thu, Jul 30, 11:54 AM ET, by ETF Channel

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

First Trust Germany AlphaDEX Fund (FGM) Shares Cross Below 200 DMA
Thu, Jul 30, 11:34 AM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Germany AlphaDEX Fund ETF (FGM) crossed ...

PDP, STRZA, ORLY, DPZ: Large Inflows Detected at ETF
Thu, Jul 30, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PDP, STRZA, ORLY, DPZ Exchange traded funds (ETFs) trade just ...

IWF: Large Outflows Detected at ETF
Thu, Jul 30, 11:14 AM ET, by ETF Channel

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

FEZ: Large Inflows Detected at ETF
Thu, Jul 30, 11:14 AM ET, by ETF Channel

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

IEMG: ETF Inflow Alert
Thu, Jul 30, 11:14 AM ET, by ETF Channel

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

Exxon Mobil a Top Ranked SAFE Dividend Stock With 3.5% Yield (XOM)
Thu, Jul 30, 8:14 AM ET, by ETF Channel

Exxon Mobil Corp. (XOM) has been named to the Dividend Channel ''S.A.F.E. ...

PX Named A Top Socially Responsible Dividend Stock
Thu, Jul 30, 8:14 AM ET, by ETF Channel

Praxair, Inc. (PX) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

United Technologies a Top 25 Dividend Giant With 2.58% Yield (UTX)
Thu, Jul 30, 8:14 AM ET, by ETF Channel

United Technologies Corp. (UTX) has been named as a Top 25 ''Dividend Giant'' by ETF ...

VPL Makes Bullish Cross Above Critical Moving Average
Wed, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Vanguard FTSE Pacific ETF (VPL) crossed above their ...

Vanguard Value Breaks Above 200-Day Moving Average - Bullish for VTV
Wed, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Vanguard Value ETF (VTV) crossed above their 200 ...

IWX Crosses Above Key Moving Average Level
Wed, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Russell Top 200 Value ETF (IWX) crossed ...

ProShares Short FTSE China 50 Breaks Below 200-Day Moving Average - Notable for YXI
Wed, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the ProShares Short FTSE China 50 ETF (YXI) crossed ...

VT Crosses Above Key Moving Average Level
Wed, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Vanguard Total World Stock ETF (VT) crossed above ...

FEX Makes Bullish Cross Above Critical Moving Average
Wed, Jul 29, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Large Cap Core AlphaDEX Fund ETF ...

iShares Core Aggressive Allocation Breaks Above 200-Day Moving Average - Bullish for AOA
Wed, Jul 29, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Core Aggressive Allocation ETF (AOA) crossed above ...

See How Caterpillar Ranks Among Analysts' Top Dow 30 Picks
Wed, Jul 29, 11:54 AM ET, by ETF Channel

A study of analyst recommendations at the major brokerages shows that Caterpillar Inc. (CAT) is ...

PPA Crosses Above Key Moving Average Level
Wed, Jul 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares Aerospace & Defense Portfolio ETF (PPA) crossed ...

GLDX Crosses Critical Technical Indicator
Wed, Jul 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the Gold Explorers ETF (GLDX) entered into oversold territory, ...

Shares of XOP Now Oversold
Wed, Jul 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P Oil & Gas Exploration & Production ...

SIJ Makes Notable Cross Below Critical Moving Average
Wed, Jul 29, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the ProShares UltraShort Industrials ETF (SIJ) crossed below their ...

EPI: Large Outflows Detected at ETF
Wed, Jul 29, 11:14 AM ET, by ETF Channel

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

VIG, MSFT, JNJ, MDT: Large Outflows Detected at ETF
Wed, Jul 29, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VIG, MSFT, JNJ, MDT Exchange traded funds (ETFs) trade just ...

FVD, TE, MO, LMT: Large Inflows Detected at ETF
Wed, Jul 29, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: FVD, TE, MO, LMT Exchange traded funds (ETFs) trade just ...

KRE, FCNCA, FHN, STL: Large Inflows Detected at ETF
Wed, Jul 29, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, FCNCA, FHN, STL Exchange traded funds (ETFs) trade just ...

IXJ: ETF Outflow Alert
Wed, Jul 29, 10:54 AM ET, by ETF Channel

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

iShares Short Maturity Bond ETF Experiences Big Inflow
Wed, Jul 29, 10:54 AM ET, by ETF Channel

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

IWB: Large Inflows Detected at ETF
Wed, Jul 29, 10:54 AM ET, by ETF Channel

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

Why HCP is a Top 25 SAFE Dividend Stock (HCP)
Wed, Jul 29, 9:34 AM ET, by ETF Channel

HCP, Inc. (HCP) has been named to the Dividend Channel ''S.A.F.E. ...

Why Merck is a Top Socially Responsible Dividend Stock (MRK)
Wed, Jul 29, 9:34 AM ET, by ETF Channel

Merck & Co., Inc (MRK) has been named a Top Socially Responsible Dividend Stock by ...

TNA: ETF Inflow Alert
Tue, Jul 28, 12:44 PM ET, by ETF Channel

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

AGZ: Large Outflows Detected at ETF
Tue, Jul 28, 12:44 PM ET, by ETF Channel

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

  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 - 2015, 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.