Equal weight is a type of proportional measuring method that gives the same importance to each stock in a portfolio, index, or index fund. So stocks of the smallest companies are given equal statistical significance, or weight, to the largest companies when it comes to evaluating the overall group's performance.
Equal weight is a proportional measure that gives the same importance to each stock in a portfolio or index fund, regardless of a company's size.
Equal weight contrasts with weighting by market capitalization, which is more commonly used by indexes and funds.
The concept of equally-weighted portfolios has gained interest due to the historical performance of small-cap stocks and the emergence of several exchange-traded funds(ETFs).
Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds, and as a result, they usually have higher trading costs.
Equal weight differs from the method more commonly used by indexes, funds, and portfolios in which stocks are weighted based on their market capitalization.
Many of the largest and most well-known market indices are either market capitalization-weighted or price-weighted. Market-cap-weighted indices, such as the Standard & Poor's (S&P) 500, give greater weight to the biggest companies according to market capitalization. Large-caps such as Apple and Microsoft are among the biggest holdings in the S&P 500. Price-weighted indices, such as theDow Jones Industrial Average (DJIA), give larger weightings to stocks with higher stock prices.
The concept of equally-weighted portfolios has gained interest due to the historical performance of small-cap stocks and the emergence of several exchange-traded funds(ETFs). Standard & Poor's has developed more than 80 different equal-weight indices based on combinations of market cap, market, and sector.
In the Dow SPDR Dow Jones Industrial Average ETF Trust (DIA), an exchange-traded fund that tracks the DJIA, the largest holdings,as of September 2021, are United HealthGroup, Goldman Sachs, and The Home Depot.
Small-cap stocks are generally considered to be higher risk, higher potential return investments compared to large-caps. In theory, giving greater weight to the smaller names of the S&P 500 in an equal-weight portfolio should increase the return potential of the portfolio. Historically, this has been the case—in the short term. From September 2020 to September 2021, the total one-year return for the S&P 500 Equal Weight Index (EWI) was 41.93%, vs. 33.72% for the traditional S&P 500 Index.
However, over the long term, the gap narrows—and in fact, the returns flip. The 10-year annualized total return (September 2019-September 2021) for the S&P 500 Equal Weight Index was 15.32%, but the S&P 500 outperformed it, returning 16.32%.
S&P Global (the parent company of Standard & Poor's) developed the S&P 500Equal Weight Index in January 2003—an equal-weight version of the popular S&P 500 Index, as the name suggests. Although both indexes are comprised of the same stocks, the different weighting schemes result in two indexes with different properties and different benefits for investors.
Examples of Equal-Weight Funds
Invesco offers more than a dozen different equal-weight funds covering not only major indices such as the S&P 500 but also many of the market's major sectors. The Invesco S&P 500 Equal Weight ETF (RSP), for example, provides the same exposure to the smallest companies in the S&P 500 as it does to corporate giants such as General Electric.
Equal-weight index funds tend to have higher portfolio turnover than market-cap weighted index funds: The fund manager has to periodically rebalance investment amounts so that each holding represents the same percentage amount of the total portfolio. As a result, they usually have higher trading costs, and their trading prices can be more volatile than in regular index funds. However, equal-weight ETFs offer more protection if a large sector experiences a downturn.
Other examples of equal-weight index ETFs include the Invesco Russell 1000 Equal Weight ETF, which is based on the Russell 1000Equal Weight Index,and the First Trust NASDAQ-100 Equal Weighted Index Fund, which uses the NASDAQ-100 Equal Weighted Index as its benchmark.
Although equal weighted ones may or may not have truly better performance, especially when you stick to the broad market or the S&P 500, there are definitely some trade-offs. Pros: Under the largest sample sizes, their long-term performance appears to be superior, at least for non-tech groupings.
Equal-Weighted ETFs can be found in the following asset classes: EquityFixed IncomeCurrencyAlternativesAsset AllocationThe largest Equal-Weighted ETF is the Invesco S&P 500 Equal Weight ETF RSP with $57.60B in assets. In the last trailing year, the best-performing Equal-Weighted ETF was FNGU at 57.27%.
Equal-weighted indexes, in effect, favor smaller companies by giving them the same importance as large-cap firms. They remove the market cap bias, giving an equal shot to every company within the index.
For example, in an equal-weighted portfolio of 10 stocks, each stock would be allocated 10% of the portfolio's total value. If the portfolio were rebalanced periodically, the allocation to each stock would be adjusted back to 10% to maintain equal weighting.
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Low 2 bps Expense Ratio: Compared to other S&P 500® ETFs, SPLG boasts a significantly lower 2 bps expense ratio — which may translate to substantial savings over the long-term for cost-conscious investors.
Over the past 10 years, this ETF has substantially outperformed the S&P 500 -- earning total returns of more than 272% compared to the index's 176% in that time. There are no guarantees that this ETF will continue earning similar returns over time.
The index is an equal-weighted version of the S&P 500® Index, which measures the performance of equity securities of larger U.S. companies. The fund can invest in derivative instruments including futures contracts.
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
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Equal-weighted portfolios have produced higher returns than cap-weighted ones because they have more exposure (they “tilt”) to factors such as size and value that have historically provided premiums.
In an equally weighted portfolio, the same weight or importance is assigned to each security in the portfolio. The total portfolio weight is 100%. If you have N securities in the portfolio, each security will weigh (100/N)% in an equally weighted portfolio.
Value of equal weight index = (Price of stock A * weight assigned) + (Price of stock B * weight assigned) + (Price of stock C * weight assigned) +…. so on.
Compared to market-cap-weighted index funds, equal-weight index funds provide several advantages. Equal-weight index funds provide better diversity by ensuring each company, regardless of size, has an equal impact on the portfolio. This lessens the risk of concentration and can improve long-term performance.
The market cap weighted S&P 500 Index (the traditional version) is not rebalanced and has higher concentrations to larger, growth companies, while the equal weight index has more exposure to smaller and value-oriented companies.
Equal-weighted portfolios have produced higher returns than cap-weighted ones because they have more exposure (they “tilt”) to factors such as size and value that have historically provided premiums.
In addition, when the VIX is above its long-term average of 19.6, equal weight outperforms on average compared to periods of low volatility when market cap prevails like last year. In 2024, we do not expect a reversal in big tech but rather a broadening out in market participation due to valuations and profits.
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