A new all-ETF model portfolio is now available to ETFdb Pro members; the Equal Weight ETFdb Portfolio offers an alternative investment style for investors who wish to steer clear from the potential pitfalls of the traditional market cap-weighted methodology.
In a traditional market cap-weighted index, such as the S&P 500, each component stock is weighted according to its market capitalization (trading price multiplied by shares outstanding). Cap-weighted indexes determine the allocation given to each security based on the company’s market capitalization–and therefore the price of the stock–which can result in overweight allocations to overvalued companies and underweight allocations to undervalued stocks. The equal weight methodology has been gaining popularity as investors are realizing the potential for excess returns over traditional cap-weighted ETFs; over the last several years, many equal-weighted ETFs have outperformed their cap weighted counterparts–in some cases by a wide margin. In 2010 for example, SPY, which tracks the S&P 500 Index, lagged behind the the Rydex S&P 500 Equal Weight ETF (RSP) by about 600 basis points. Additionally, indexes that spread exposure equally across various sectors of the economy lessen the potential impact of a crash in any one industry, while the opportunity to participate in a rally in any sector is also improved. The significant difference in performance reveals valuable insights about the inefficiency of traditional cap-weighted funds, which often overlooked by many investors.
The new Equal Weight ETFdb Portfolio is designed for investors who want to build a broad-based portfolio, including domestic and international equities and fixed income. But this portfolio avoids many of the largest and most popular ETFs, utilizing instead products that maintain similar holdings but employ an equal weighting methodology. The result is a well rounded portfolio created with long-term investors in mind; this ETFdb Portfolio maintains many of the same holdings found in other all-ETF portfolios, but thanks to difference in the approach to weighting may offer an opportunity to generate excess returns over the long run.
Disclosure: No positions at time of writing.