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

Ryder System Takes Over #84 Spot From Applied Materials
Thu, Jan 29, 12:14 PM ET, by ETF Channel

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

SPY, BA, MCD, GS: ETF Outflow Alert
Thu, Jan 29, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: SPY, BA, MCD, GS Exchange traded funds (ETFs) trade just ...

HDV, GE, MO, CSCO: ETF Inflow Alert
Thu, Jan 29, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: HDV, GE, MO, CSCO Exchange traded funds (ETFs) trade just ...

QUAL, IBM, V, GOOGL: ETF Inflow Alert
Thu, Jan 29, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: QUAL, IBM, V, GOOGL Exchange traded funds (ETFs) trade just ...

VHT, UNH, BMY, LLY: ETF Inflow Alert
Thu, Jan 29, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: VHT, UNH, BMY, LLY Exchange traded funds (ETFs) trade just ...

XLU, DUK, NEE, SO: Large Inflows Detected at ETF
Thu, Jan 29, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: XLU, DUK, NEE, SO Exchange traded funds (ETFs) trade just ...

AOA Makes Notable Cross Below Critical Moving Average
Thu, Jan 29, 11:24 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares Aggressive Allocation ETF (AOA) crossed below their ...

TUR Crosses Below Key Moving Average Level
Thu, Jan 29, 11:24 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI Turkey ETF (TUR) crossed below their ...

IYJ Crosses Below Key Moving Average Level
Thu, Jan 29, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Industrials ETF (IYJ) crossed below their ...

TYBS Crowded With Sellers
Thu, Jan 29, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Daily 20+ Year Treasury Bear 1x Shares ETF ...

Praxair Top Socially Responsible Dividend Stock With 2.3% Yield (PX)
Thu, Jan 29, 9:24 AM ET, by ETF Channel

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

UTX a Top 25 Dividend Giant With $4.31B Held By ETFs
Thu, Jan 29, 9:24 AM ET, by ETF Channel

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

First Trust Mega Cap AlphaDEX Fund (FMK) Shares Cross Below 200 DMA
Wed, Jan 28, 4:24 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Mega Cap AlphaDEX Fund ETF (FMK) ...

FYT Makes Notable Cross Below Critical Moving Average
Wed, Jan 28, 4:24 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Small Cap Value AlphaDEX Fund ETF ...

First Trust Large Cap Value AlphaDEX Fund Breaks Below 200-Day Moving Average - Notable for FTA
Wed, Jan 28, 4:24 PM ET, by ETF Channel

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

SPDR Russell/Nomura Small Cap Japan (JSC) Shares Cross Above 200 DMA
Wed, Jan 28, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR Russell/Nomura Small Cap Japan ETF (JSC) crossed ...

SCJ Crosses Above Key Moving Average Level
Wed, Jan 28, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Japan Small-Cap ETF (SCJ) crossed above ...

KRE, ISBC, NPBC, PVTB: ETF Outflow Alert
Wed, Jan 28, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, ISBC, NPBC, PVTB Exchange traded funds (ETFs) trade just ...

ACWX, INFY, BAM, IBN: ETF Outflow Alert
Wed, Jan 28, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: ACWX, INFY, BAM, IBN Exchange traded funds (ETFs) trade just ...

XLP, KO, PM, CVS: ETF Inflow Alert
Wed, Jan 28, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XLP, KO, PM, CVS Exchange traded funds (ETFs) trade just ...

BND: Large Outflows Detected at ETF
Wed, Jan 28, 10:54 AM ET, by ETF Channel

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

First Trust Small Cap Value AlphaDEX Fund -- Insider Buying Index Registering 13.5%
Wed, Jan 28, 9:54 AM ET, by ETF Channel

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

Why HCP is a Top 25 SAFE Dividend Stock (HCP)
Wed, Jan 28, 9:34 AM ET, by ETF Channel

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

Merck a Top Socially Responsible Dividend Stock With 2.9% Yield (MRK)
Wed, Jan 28, 9:34 AM ET, by ETF Channel

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

Avery Dennison Achieves #18 Analyst Rank, Surpassing Stericycle
Tue, Jan 27, 12:14 PM ET, by ETF Channel

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

MTK, CTSH, GLW, NFLX: ETF Inflow Alert
Tue, Jan 27, 11:54 AM ET, by ETF Channel

Symbols mentioned in this story: MTK, CTSH, GLW, NFLX Exchange traded funds (ETFs) trade just ...

VDE, KMI.WS, APC, PSX: Large Inflows Detected at ETF
Tue, Jan 27, 11:54 AM ET, by ETF Channel

Symbols mentioned in this story: VDE, KMI.WS, APC, PSX Exchange traded funds (ETFs) trade just ...

VUG, ACT, AGN, ESRX: ETF Inflow Alert
Tue, Jan 27, 11:54 AM ET, by ETF Channel

Symbols mentioned in this story: VUG, ACT, AGN, ESRX Exchange traded funds (ETFs) trade just ...

VDC, CL, COST, MDLZ: Large Inflows Detected at ETF
Tue, Jan 27, 11:54 AM ET, by ETF Channel

Symbols mentioned in this story: VDC, CL, COST, MDLZ Exchange traded funds (ETFs) trade just ...

Vanguard Large-Cap ETF Experiences Big Inflow
Tue, Jan 27, 11:54 AM ET, by ETF Channel

Symbols mentioned in this story: VV, MOS, BLL, NRG Exchange traded funds (ETFs) trade just ...

PRN Makes Notable Cross Below Critical Moving Average
Tue, Jan 27, 11:34 AM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares DWA Industrials Momentum Portfolio ETF (PRN) crossed ...

10.2% of FBT Holdings Seeing Recent Insider Buys
Tue, Jan 27, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust NYSE Arca Biotechnology Index ...

Kinder Morgan a Top 25 Dividend Giant With 4.26% Yield (KMI)
Tue, Jan 27, 8:54 AM ET, by ETF Channel

Kinder Morgan Inc. (KMI) has been named as a Top 25 ''Dividend Giant'' by ETF ...

PepsiCo a Top Ranked SAFE Dividend Stock With 2.7% Yield (PEP)
Tue, Jan 27, 8:54 AM ET, by ETF Channel

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

Procter & Gamble a Top Socially Responsible Dividend Stock With 2.9% Yield (PG)
Tue, Jan 27, 8:54 AM ET, by ETF Channel

Procter & Gamble Co. (PG) has been named a Top Socially Responsible Dividend Stock by ...

IPD Crosses Above Key Moving Average Level
Mon, Jan 26, 4:24 PM ET, by ETF Channel

In trading on Monday, shares of the SPDR S&P International Consumer Discretionary Sector ETF (IPD) ...

SPDR Russell Small Cap Completeness Breaks Above 200-Day Moving Average - Bullish for RSCO
Mon, Jan 26, 4:24 PM ET, by ETF Channel

In trading on Monday, shares of the SPDR Russell Small Cap Completeness ETF (RSCO) crossed ...

UCD Crowded With Sellers
Mon, Jan 26, 4:24 PM ET, by ETF Channel

In trading on Monday, shares of the ProShares Ultra Bloomberg Commodity ETF (UCD) entered into ...

EWJ Makes Bullish Cross Above Critical Moving Average
Mon, Jan 26, 4:24 PM ET, by ETF Channel

In trading on Monday, shares of the iShares MSCI Japan ETF (EWJ) crossed above their ...

SPLV, MAC, VNO, TRV: ETF Inflow Alert
Mon, Jan 26, 12:14 PM ET, by ETF Channel

Symbols mentioned in this story: SPLV, MAC, VNO, TRV Exchange traded funds (ETFs) trade just ...

CVY, PDI, HIMX, PCI: Large Outflows Detected at ETF
Mon, Jan 26, 12:14 PM ET, by ETF Channel

Symbols mentioned in this story: CVY, PDI, HIMX, PCI Exchange traded funds (ETFs) trade just ...

Japan Hedged Equity Fund (DXJ) Shares Cross Above 200 DMA
Mon, Jan 26, 11:24 AM ET, by ETF Channel

In trading on Monday, shares of the Japan Hedged Equity Fund ETF (DXJ) crossed above ...

BWZ Crosses Critical Technical Indicator
Mon, Jan 26, 11:24 AM ET, by ETF Channel

In trading on Monday, shares of the SPDR Barclays Short Term International Treasury Bond ETF ...

CUT Makes Bullish Cross Above Critical Moving Average
Mon, Jan 26, 11:14 AM ET, by ETF Channel

In trading on Monday, shares of the Guggenheim Timber ETF (CUT) crossed above their 200 ...

16.1% of DIV Holdings Seeing Recent Insider Buys
Mon, Jan 26, 9:34 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SuperDividend U.S. ETF (DIV) shows an ...

MMM a Top Socially Responsible Dividend Stock With 2.5% Yield (MMM)
Mon, Jan 26, 9:14 AM ET, by ETF Channel

3M Co (MMM) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

NUGT: Large Outflows Detected at ETF
Fri, Jan 23, 11:14 AM ET, by ETF Channel

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

SLV: ETF Outflow Alert
Fri, Jan 23, 11:14 AM ET, by ETF Channel

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

MDY, EQIX, O, AAP: ETF Outflow Alert
Fri, Jan 23, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: MDY, EQIX, O, AAP Exchange traded funds (ETFs) trade just ...

UCO: Large Inflows Detected at ETF
Fri, Jan 23, 11:14 AM ET, by ETF Channel

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

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 - 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 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.