A stock market index that invests an equal amount of money in the stock of each company in the index
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What is an Equal-Weighted Index?
An equal-weighted index is a stock market index – comprised of a group of publicly traded companies – that invests an equal amount of money in the stock of each company that makes up the index. Thus, the performance of each company’s stock carries equal importance in determining the total value of the index.
Equal-Weighted Index vs. Capitalization-Weighted Index
The standard in the world of stock investments are indexes that give weights to investments based on the market capitalization of each company contained within the index.
An index fund weighted by market capitalization invests more into certain companies than others. Regardless of the overall scale of companies that an index represents – small-cap, mid-cap, or large-cap – the index is stacked heavily in favor of the largest companies in the index.
Using the S&P 500 Index as an example, a majority of the index’s value is comprised of just the top ten companies that make up the index. One can easily see from this fact that weighting the index makes a huge difference in its calculated value, and that an equal-weighted index will differ substantially from a traditional market cap weighted index.
Value and Momentum as the Difference Makers in Indexes
It’s been said by some market analysts that equally weighted indices are based on value and market capitalization weighted indices are driven by momentum. An index with equal weight in all companies must buy and sell as shares of companies increase and decrease in value, restoring the balance by buying more shares of a company with a declining share price and selling off shares when a company sees its share price rise.
In that way, the market approach of an equal-weighted index can be viewed as a contrarian one, selling shares of popular Company A while buying shares of out-of-favor Company B.
The makeup of an index weighted by market cap, on the other hand, is dictated, to a large extent, by share price momentum. When share prices for a company increase, the index retains the shares, automatically allocating more weight to the company within the index.
A fund trading the index will funnel additional cash toward such companies as more investors invest in them. The inverse is true as well. If a company’s share price drops, the index allocates less cash toward the company’s stock and accords it less weight within the index.
Equal-Weighted Indexes and the Power of the Small Business
Equal-weighted indexes, in effect, favor smaller companies by according them the same importance as large-cap firms. They remove the market cap bias, giving an equal shot to every company within the index. This means that even the smallest of companies exerts more power in an equal-weighted index than it would in one weighted by market capitalization.
Advantages of Equal-Weighted Index Funds
An equal-weighted index fund comes with both advantages and disadvantages relative to a market cap weighted index fund. Some of the primary pros and cons of an equal-weighted index fund are as follows:
Disadvantages of Equal-Weighted Index Funds
- Equal-weighted indexes feature a higher portfolio turnover rate, which means higher total transaction costs, and which can also result in less favorable tax treatment
- They are more vulnerable to sudden, volatile drops in value during a bear market phase (In contrast, market cap weighted funds that are more heavily invested in large-cap, blue chip stocks are likely to be more stable in bear markets).
Equal-weighted indexes provide an important alternative calculation of the overall value of the market. For investors, the choice as to whether to invest in a fund that uses an equal-weighted index or a market capitalization-weighted index simply comes down to which kind of index they believe is most likely to exhibit the highest return on investment (ROI).
From 2009 through 2018, an equal-weighted index version of the S&P 500 Index consistently outperformed the standard market cap-weighted index. However, an equal-weighted index of the NASDAQ-100 Index underperformed compared to the market cap-weighted NASDAQ-100 Index over the same time period. Thus, there’s no clear or easy answer to the question, “Which is better, a market cap weighted index fund or an equal-weighted index fund?”
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FAQs
An equal-weighted index is a stock market index – comprised of a group of publicly traded companies – that invests an equal amount of money in the stock of each company that makes up the index. Thus, the performance of each company's stock carries equal importance in determining the total value of the index.
What is the an equally weighted index formula? ›
To find an equal-weighted index value, you would simply add the share price of each stock together, then multiply it by the weight. So for example, say an index has five stocks priced at $100, $50, $75, $90 and $85. Each one would be weighted at 20%.
Is the S&P 500 market weighted or equal-weighted? ›
The S&P 500, which is market-cap weighted, is about 26% more expensive than its average valuation of 16.2x back since 2009, while the S&P 500 equal weight is only 5% more expensive. From a valuation perspective, there may be more room to run for a broader set of stocks.
What is equal weight US index? ›
The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
What is equal weight in index funds? ›
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.
Is the S&P 500 index an equal-weighted index? ›
Fund description
The Invesco S&P 500® Equal Weight ETF (Fund) is based on the S&P 500® Equal Weight Index (Index). The Fund will invest at least 90% of its total assets in securities that comprise the Index. The Index equally weights the stocks in the S&P 500® Index.
What is an example of equal-weighted index? ›
An example of an equal-weighted index that monitors the performance of large-cap U.S. businesses is the Equal-Weighted Wilshire Large-Cap Index. Regardless of the market capitalization of each company, this index offers equal exposure to all of them.
Is the Dow an equal weighted index? ›
The Dow Jones Industrial Average® Equal Weight is the equal-weight version of the Dow Jones Industrial Average, which seeks to measure the performance of 30 U.S. blue-chip companies.
What is the Dow Jones equal weighted index? ›
The index gives equal exposure to all Dow 30 constituents. The same weight is given to each stock in the index, allowing for the performance of lower priced companies to contribute as much as the higher priced companies within the index.
What is the equal weighted version of the S&P 500? ›
The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
Disadvantages of Equal-Weighted Index Funds
They are more vulnerable to sudden, volatile drops in value during a bear market phase (In contrast, market cap weighted funds that are more heavily invested in large-cap, blue chip stocks are likely to be more stable in bear markets).
What is the difference between equal weighted index and price weighted index? ›
See how an index's composition changes depending on how it's weighted. If an index is equal-weighted, all component stocks have the same impact on index performance. If the index was price-weighted, Company A would have the greatest influence on index performance, because it has the highest stock price.
What is the best equal weighted ETF for the S&P 500? ›
Invesco S&P 500 Equal Weight ETF (RSP)
The Invesco S&P 500 Equal Weight ETF tracks an equal weight S&P 500 index and is rebalanced quarterly. The fund increases exposure to smaller companies and reduces concentration risk, relative to market-cap weighted indexes.
Why use equal weight ETF? ›
Equal-weight ETFs provide a compelling alternative to the traditional market-cap-weighted structure, as each component of the index receives an equal weighting in the portfolio. For investors wanting more diversified exposure to the components in an index, equal weighting can be a simple low-cost solution.
What is the largest equal weight ETF? ›
By rebalancing regularly to maintain equal weightings, these ETFs ensure that each stock has an equal influence on fund performance. The largest equal-weighted ETF is the Invesco S&P 500 Equal Weight ETF (RSP).
What is the S&P 100 equal weight index? ›
The S&P 100® Equal Weight Index (EWI) is the equal-weight version of the S&P 100. The index has the same constituents as the capitalization weighted S&P 100, but each company in the S&P 100 EWI is allocated an equal weight at each rebalance.
What is the method of weighted index? ›
Weighted Index Numbers can be constructed by using two methods: Weighted Average of Price Relatives Method and Weighted Aggregative Method. Under the Weighted Aggregative Method, different weights are given to different goods according to the quantity bought.
How do you find the weighted mean using equal weights? ›
The weighted mean formula statistics are calculated by multiplying the weight with the quantitative outcome and adding all the products. If all the weights are equal, then the weighted mean and arithmetic mean will be the same.
What is the formula for weighted average index in Excel? ›
To calculate the weighted average in Excel, you must use the SUMPRODUCT and SUM functions using the following formula: =SUMPRODUCT(X:X,X:X)/SUM(X:X) This formula works by multiplying each value by its weight and combining the values. Then, you divide the SUMPRODUCT but the sum of the weights for your weighted average.
What does equally weighted mean in math? ›
A weighted average is a method of computing an average where some data points contribute more than others. If all the weights of the data point are equal then the weighted average is the same as the mean.
