Most Index exchange traded funds (ETFs) hold specific weightings
of underlying securities based on market capitalization. Market cap
weighting has been the cornerstone of index construction - look at
the Dow Jones Industrials and the S&P 500 Index. Today
investors are warming up to other forms of index construction, like
equal-weight indexing the the ETFs that represent them.
The equal-weighting schematic is transparent, inexpensive and
helps diversify,
writes Will McClatchy for ETFZone
.
Rydex S&P Equal Weight ETF (AMEX: New ETF Equal Weights
the World.]
By placing each company in equal weight, the fund spreads out
the individual risk of an ailing company from heavily affecting the
ETF. If 500 stocks were held in equal ratios, the risk of one
company tanking is about .2%, as compared to the 1% to 5% exposure
for each of the top 10 holdings of the S&P.
Since equal-weight ETFs hold small- and mid-caps in equal with
with large-caps, equal-weight ETFs may slightly outperform
market-cap ETFs - smaller companies outperform larger ones in the
long run.
If you like to pick out individual sectors to tailor your
investments needs for the day, then you may consider equal-weight
sector ETFs, as well:
-
Rydex S&P Equal Weight Consumer Discretionary ETF (
RCD
)
-
Rydex S&P Equal Weight Consumer Staples ETF (
RHS
)
-
Rydex S&P Equal Weight Energy ETF (
RYE
)
-
Rydex S&P Equal Weight Financial ETF (
RYF
)
-
Rydex S&P Equal Weight Health Care ETF (
RYH
)
-
Rydex S&P Equal Weight Industrials ETF
(RGI)
-
Rydex S&P Equal Weight Materials ETF (RTM)
-
Rydex S&P Equal Weight Technology ETF
(RYT)
-
Rydex S&P Equal Weight Utilities ETF (RYU)
Rydex
equal-weight company holdings usually don't exceed 5%.
It should be noted that liquidity for these funds can drop and
the strategy emphasizes fragmented industries. For example, as
financials recently rose in prominence, volatility also spiked.
Additionally, one shouldn't replace small-cap holdings for
equal-weighting plays.
Another equal-weight play is the
First Trust NASDAQ-100 Equal Weighted ETF (NasdaqGM:
QQEW)
, which holds large-cap high-tech stocks that have good
liquidity.
For more information on equal-weight strategy, visit our
equal-weight ETFs category
.
Read the disclaimer
; Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article
.