Most index ETF’s bought by investors today, including SPY , QQQ , FTSE 100 ,ISEQ 20, are market-capitalization weighted. A company's weight in an ETF is determined by its total market capitalization, or the share price multiplied by total shares outstanding. Therefore, the returns of large-cap stocks in the index play a much greater role in the overall index performance than small caps. When large-caps are Performing their dominance is overwhelming and can mask the overall health of the ETF. And the opposite is also true ( eg BP).
While and Equal weighted Index ETF is just as it sounds. Every stock in the index has the same weight, regardless how large or small the company is. So in the S&P 500 equally weighted portfolio Microsoft will have an equal weighting with Paychex Inc.
In my view an equal weighted has 2 advantages.
1. Kenneth French from Dartmouth's Tuck School and the University of Chicago's Eugene Fama, have shown that small cap outperformed other securities over most significant historical periods, so an equal weighted ETF sould take advantage of this finding and should produce larger returns.( link to academic paper)
2. In an equal weighting ETF when rebalancing you are essentially selling your winners and buying loosers. So it’s a play on the market reverting to the mean. mean reversion refers to the tendency of extreme performers ,(either high or low), in one period to perform the opposite in the future.( for more on mean reversion)
Disadvantage
1. For equal weighting, large transaction are incurred for the constant re-weighting back to the original equal dollar amounts,( From 2002 to 2008, the amount of average annual turnover for the Equally Wweighed version of the S&P500 was about 22%, versus 4% for Index) .
But we can use the Equal weighting as a proxy for the health of the Cap weighted EFT.
I ll have a look of I can get some get the correct data to come try and test this hypothesis.
Fundamentally weighted Indexes could provide better returns? Intresting
Chart of SPY vs RSP.
Why not start your Zignals Trading Strategy Business with us today? Learn How to promote your Zignals Trading Business with Twitter.Follow us on twitter hereHow to Get Started with ZignalsBuild a trading strategy in Zignals and potentially earn money too; download our Build a Trading Strategy PDF and get selling (and trading) today!Dr. Declan Fallon, Senior Market Technician for Zignals.com, offers a range of stock trading strategies via his Zignals home page. Each Zignals member has an unique home page which they can share with friends and clients to sell their strategies. Zignals offers a full suite of financial services including price and fundamental stock alerts, stock charts for Indian, Australian, Frankfurt, Euronext, UK, Ireland and Canadian stocks, tabbed stock quote watchlists, multi-currency portfolio manager, active stock screener with fundamental trading strategy support and trading system builder. Forex, precious metal and energy commodities too. Build your own trading system and sell your trading strategy in our MarketPlace to earn real cash. Read what others are saying about Zignals on Investimonials.com. JOIN US TODAY - IT'S FREE!
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Loading...
Benzinga simplifies the market for smarter investing
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
Join Now: Free!
Already a member?Sign in
