Equal weight investing has become an increasingly popular strategy among investors in recent years. The key idea behind it is to allocate an equal amount of portfolio weight to each stock held, rather than weighting stocks based on their market capitalization like traditional market-cap weighted indexes. This article will provide an introduction to equal weight investing, look at some examples of equal weight indexes and portfolios, and summarize key facts and conclusions around this strategy.
What is equal weight investing
Equal weight investing is an investment strategy that weights each stock equally in a portfolio, regardless of the stocks’ market capitalizations. This differs from traditional market capitalization weighted indexes like the S&P 500, where larger companies make up a greater portion of the index. An equal weight S&P 500 index, for example, would devote 0.2% of the portfolio to each of the 500 constituents.
Examples of equal weight indexes and ETFs
There are now a number of equal weight stock indexes and ETFs available in the market. Some examples include:
– S&P 500 Equal Weight Index: Includes all 500 stocks in the S&P 500, weighting each company equally.
– Invesco S&P 500® Equal Weight ETF (RSP): Tracks the S&P 500 Equal Weight Index.
– Invesco Russell 1000® Equal Weight ETF (EQAL): Holds equity in the Russell 1000 index, equally-weighting each position.
– Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW): Invests in large U.S. stocks, equal weighting each position.
Key facts and conclusions on equal weight investing
Research has shown some key facts and conclusions around equal weight investing strategies:
– They have historically outperformed the market-cap weighted S&P 500 over long periods.
– The bulk of outperformance generally comes from the smaller size factor exposure.
– Equal weight portfolios rebalance more frequently, resulting in higher turnover and taxes.
– They tilt toward smaller, more volatile stocks which can increase risks.
– Future outperformance is uncertain as more assets flow into the strategy.
In summary, equal weight investing evenly splits up portfolio exposure across holdings, reducing concentration risk from mega-cap companies. It has historically delivered returns above the market over the long run but comes with higher turnover costs and tilts towards more volatile segments of the market.