In November, nine new equal weight sector ETFs began trading. They are sponsored by Rydex, and they are counterparts to the original nine Sector Spiders that are composed of the stocks in the S&P 500 Index. I have been a long-time and enthusiastic advocate of equal weighted indexes because they truly allow you to spread your risk equally among all the stocks in the index, and I am very pleased to see these newest trading vehicles become available. Let's take a moment to explain what an equal weighted index is.
Most market/sector indexes are weighted by capitalization, which means that the largest cap stocks exert the most influence on the price movement of the index. For example, I once examined the S&P 500 Index and found that the top 50 stocks (ranked by market cap) actually represented about 70% of the entire S&P 500. What this means is that the remaining 450 stocks have very limited influence on the index.
In the case of these new equal weighted sector ETFs, each stock in the sector is initially given an equal weight in the index, and re-balancing takes place on a quarterly basis.
In addition to avoiding overexposure to the larger-cap stocks in the index, equal weight indexes usually perform better than their cap-weighted counterparts. This is because the smaller-cap stocks, which usually perform better than larger-cap stocks, have a heavier weight in the index.
The new ETFs are currently very thinly traded, but this should change as soon as they have been "discovered".
Author: Carl Swenlin
http://www.decisionpoint.com/
