Many investors have trusted the plain vanilla index fund as a steady and reliable investment strategy, but there are other approaches to indexing that can add some spice to many portfolios and add a certain appeal to some ETFs.
Equal weighting is an indexing strategy that gives every holding or company in the index equal exposure. There are no market caps or influence one way or another. Jonathon Burton for The Wall Street Journal further explains that this means index funds that track the S&P 500 Index — and follow this approach — give Exxon Mobil (XOM), No. 1 with a market value of $352 billion, the same exposure as No. 500 Dynegy (DYN), which has a market value of about $2 billion. Equal attention and exposure is given to the performance of all stocks.
This method of indexing may prove to be beneficial with the possibility of a small-cap rally leading the recovery. As of 2009, small-cap stocks have been outperforming their larger leaders, which is generally the trend after a recession. Small caps are smaller, more nimble and quicker to react.
Keep in mind that equally weighted ETFs tend to be more volatile, yet they can give equal weight within a specific sector. This specialized tool can prove to be worth its own weight in the meantime, if you follow the market trends and are ready to invest with a strategy in place.
- Rydex S&P Equal Weight Consumer Discretionary (RCD)
- Claymore/BNY Mellon EW Euro-Pacific Leaders (EEN)
- First Trust NASDAQ-100 Equal Weight (QQEW)
Read the disclosure, as Tom Lydon is a board memeber of Rydex Funds.