Entering text into the input field will update the search result below

The Equal Weight Alternative

Mar. 01, 2018 2:17 AM ET
S&P Dow Jones Indices profile picture
S&P Dow Jones Indices

By William Belden

While there has been a proliferation of index-based products designed to offer beta solutions across market segments, not all index-based products are created equally. Equal weight strategies generate unbiased exposure to market risk factors, providing potential for enhanced risk control and opportunity to capture long-term equity outperformance.

Equal weight investing is a smart beta strategy that does exactly what its name implies - it equally weights every stock in the strategy regardless of its market capitalization. In contrast to traditional cap-weighted approaches - where each stock is weighted based on its size (or market capitalization), potentially resulting in increased concentration risk - equal weight investing creates unbiased exposure to all stocks. No one stock is more important than any other. Equal weighting can be applied to broad market indices, such as the well-known S&P 500® Index, as well as to sectors.

Balanced Exposure-Reducing Overconcentration

Equal weighting offers balanced exposure across all the stocks in an index, not just the largest capitalization stocks. Investors who want to invest in a broad market index, but don't want their investment to be dependent on the performance of the largest capitalization companies, may find an equal weight strategy attractive for reducing overconcentration risk relative to traditional market cap weighting and broadening return potential. The chart below shows the dramatic difference between the two weighting strategies in terms of stock composition.

Disciplined Rebalancing - "Buy Low, Sell High"

Disciplined rebalancing may also contribute to outperformance for equal weight strategies, as equal weight allocations are regularly rebalanced back to their equal weight status. This dynamic approach eliminates emotional attachment to stocks that experience price run-ups and offers a contrarian perspective via a buy low/sell high discipline. The majority of S&P 500® equal weight outperformance versus the S&P 500® Index (cap-weight) can be

This article was written by

S&P Dow Jones Indices profile picture
At S&P Dow Jones Indices, our role can be described in one word: essential. We’re the largest global resource for index-based concepts, data and research, and home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based upon our indices than any other index provider in the world; with over 1,000,000 indices, S&P Dow Jones Indices defines the way people measure and trade the markets. We provide essential intelligence that helps investors identify and capitalize on global opportunities. S&P Dow Jones Indices is a division of S&P Global, which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spdji.com.Copyright © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI please visitwww.spdji.com. For full terms of use and disclosures please visit www.spdji.com/terms-of-use.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.