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

VUG Crosses Above Key Moving Average Level
Mon, Oct 20, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Vanguard Growth ETF (VUG) crossed above their 200 ...

NASDAQ-100 Equal Weighted Index Shares Breaks Above 200-Day Moving Average - Bullish for QQQE
Mon, Oct 20, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the NASDAQ-100 Equal Weighted Index Shares ETF (QQQE) crossed ...

Pharmaceutical (PPH) Shares Cross Above 200 DMA
Mon, Oct 20, 3:54 PM ET, by ETF Channel

In trading on Monday, shares of the Pharmaceutical ETF (PPH) crossed above their 200 day ...

Proshares Ultra High Yield (UJB) Shares Cross Above 200 DMA
Mon, Oct 20, 3:54 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares Ultra High Yield ETF (UJB) crossed above ...

iShares Select Dividend Breaks Above 200-Day Moving Average - Bullish for DVY
Mon, Oct 20, 3:54 PM ET, by ETF Channel

In trading on Monday, shares of the iShares Select Dividend ETF (DVY) crossed above their ...

IWF Makes Bullish Cross Above Critical Moving Average
Mon, Oct 20, 3:54 PM ET, by ETF Channel

In trading on Monday, shares of the iShares Russell 1000 Growth ETF (IWF) crossed above ...

IWY, GOOGL, FB, PEP: ETF Inflow Alert
Mon, Oct 20, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: IWY, GOOGL, FB, PEP Exchange traded funds (ETFs) trade just ...

UUP: Large Inflows Detected at ETF
Mon, Oct 20, 11:24 AM ET, by ETF Channel

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

OEF, INTC, ORCL, ABBV: Large Inflows Detected at ETF
Mon, Oct 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: OEF, INTC, ORCL, ABBV Exchange traded funds (ETFs) trade just ...

VTV, WFC, BRK.B, JPM: ETF Inflow Alert
Mon, Oct 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VTV, WFC, BRK.B, JPM Exchange traded funds (ETFs) trade just ...

BIV: ETF Inflow Alert
Mon, Oct 20, 11:14 AM ET, by ETF Channel

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

FAS, AFL, AMG, ARE: ETF Inflow Alert
Mon, Oct 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: FAS, AFL, AMG, ARE Exchange traded funds (ETFs) trade just ...

14.6% of FYT Holdings Seeing Recent Insider Buys
Mon, Oct 20, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust Small Cap Value AlphaDEX ...

SKT Named Top 25 SAFE Dividend Stock Increasing Payments For Decades
Mon, Oct 20, 9:34 AM ET, by ETF Channel

Tanger Factory Outlet Centers, Inc. (SKT) has been named to the Dividend Channel ''S.A.F.E. ...

CHLC Crosses Below Key Moving Average Level
Fri, Oct 17, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the Renminbi Bond ETF (CHLC) crossed below their 200 ...

Regeneron Pharmaceuticals Moves Up In Analyst Rankings, Passing Harman International Industries
Fri, Oct 17, 11:54 AM ET, by ETF Channel

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

SSO, AES, A, GAS: ETF Outflow Alert
Fri, Oct 17, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: SSO, AES, A, GAS Exchange traded funds (ETFs) trade just ...

VO, AVGO, CMG, MCO: ETF Inflow Alert
Fri, Oct 17, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VO, AVGO, CMG, MCO Exchange traded funds (ETFs) trade just ...

SDOW Crosses Below Key Moving Average Level
Fri, Oct 17, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Proshares UltraPro Short Dow30 ETF (SDOW) crossed below ...

Daily Technology Bull 3x Shares Breaks Above 200-Day Moving Average - Bullish for TECL
Fri, Oct 17, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Daily Technology Bull 3x Shares ETF (TECL) crossed ...

Proshares Short Dow30 Breaks Below 200-Day Moving Average - Notable for DOG
Fri, Oct 17, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the Proshares Short Dow30 ETF (DOG) crossed below their ...

iShares MSCI Indonesia Breaks Above 200-Day Moving Average - Bullish for EIDO
Fri, Oct 17, 11:14 AM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Indonesia ETF (EIDO) crossed above their ...

First Trust NYSE Arca Biotechnology Index Fund Experiences Big Inflow
Fri, Oct 17, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: FBT, EXAS, UTHR, BMRN Exchange traded funds (ETFs) trade just ...

DWAS, AKRX, PCRX, LCI: Large Outflows Detected at ETF
Fri, Oct 17, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: DWAS, AKRX, PCRX, LCI Exchange traded funds (ETFs) trade just ...

SLX Crosses Critical Technical Indicator
Thu, Oct 16, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Steel ETF (SLX) entered into oversold territory, changing ...

Shares of FTSL Now Oversold
Thu, Oct 16, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Senior Loan Fund ETF (FTSL) entered ...

Gannett Takes Over #48 Spot From Agilent Technologies
Thu, Oct 16, 11:54 AM ET, by ETF Channel

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

KXI Crosses Critical Technical Indicator
Thu, Oct 16, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares Global Consumer Staples ETF (KXI) entered into ...

KIE Crowded With Sellers
Thu, Oct 16, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Insurance ETF (KIE) entered into oversold ...

ETFS Physical Platinum Shares (PPLT) Enters Oversold Territory
Thu, Oct 16, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the ETFS Physical Platinum Shares ETF (PPLT) entered into ...

Shares of DHS Now Oversold
Thu, Oct 16, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the WisdomTree Equity Income Fund ETF (DHS) entered into ...

IHY Crosses Critical Technical Indicator
Thu, Oct 16, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the International High Yield Bond ETF (IHY) entered into ...

Shares of IYC Now Oversold
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Consumer Services ETF (IYC) entered into ...

MOAT Crosses Critical Technical Indicator
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Morningstar Wide Moat ETF (MOAT) entered into oversold ...

Shares of XLY Now Oversold
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Consumer Discretionary Select Sector SPDR Fund ETF (XLY) ...

FAS Crosses Critical Technical Indicator
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Daily Financial Bull 3x Shares ETF (FAS) entered ...

EMB: Large Inflows Detected at ETF
Thu, Oct 16, 10:54 AM ET, by ETF Channel

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

ETFS Physical Palladium Shares (PALL) Enters Oversold Territory
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the ETFS Physical Palladium Shares ETF (PALL) entered into ...

First Trust Dow Jones Internet Index Fund (FDN) Enters Oversold Territory
Thu, Oct 16, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Dow Jones Internet Index Fund ETF ...

MCD Named Top 25 SAFE Dividend Stock Increasing Payments For Decades
Thu, Oct 16, 8:34 AM ET, by ETF Channel

McDonald's Corp (MCD) has been named to the Dividend Channel ''S.A.F.E. 25'' list, signifying a ...

Brazil Consumer (BRAQ) Shares Cross Below 200 DMA
Wed, Oct 15, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Brazil Consumer ETF (BRAQ) crossed below their 200 ...

EGShares S&P Emerging Markets Core (EMCR) Shares Cross Below 200 DMA
Wed, Oct 15, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the EGShares S&P Emerging Markets Core ETF (EMCR) crossed ...

EU Crosses Above Key Moving Average Level
Wed, Oct 15, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the WisdomTree Euro Debt Fund ETF (EU) crossed above ...

PUI Crowded With Sellers
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares DWA Utilities Momentum Portfolio ETF (PUI) entered ...

Proshares Ultra Consumer Goods Getting Very Oversold
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the Proshares Ultra Consumer Goods ETF (UGE) entered into ...

IYG Crowded With Sellers
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares U.S. Financial Services ETF (IYG) entered into ...

PIE Crosses Critical Technical Indicator
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares DWA Emerging Markets Momentum Portfolio ETF (PIE) ...

Shares of FXO Now Oversold
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Financials AlphaDEX Fund ETF (FXO) entered ...

FLN Crosses Critical Technical Indicator
Wed, Oct 15, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Latin America AlphaDEX Fund ETF (FLN) ...

Electronic Arts Takes Over #144 Spot From MasterCard
Wed, Oct 15, 12:14 PM ET, by ETF Channel

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

Related videos | all videos »
  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 - 2014, 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 over 1000 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.