Rydex, building off the launch of five equal-weight ETFs last month, announced today the debut of the MSCI All Country World Equal Weight ETF (EWAC). The new fund will seek to replicate the MSCI All Country World Equal Weighted Index, providing an alternative for investors seeking a one stop shop for global equity exposure. The underlying index is a free float-adjusted equal weighted benchmark that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI Index consists of 45 country indexes comprising 24 developed and 21 emerging market country benchmarks.
Rydex launched emerging markets (EWEM) and EAFE (EWEF) equal weight ETFs in December, along with equal-weighted versions of the Russell 1000 and Russell 2000 and an equal-weighted midcap ETF. The company’s equal-weighted S&P 500 ETF (RSP) turned in a stellar performance in 2010, beating the cap-weighted SPY by close to 600 basis points on the year.
An existing iShares ETF, the MSCI ACWI Index Fund (ACWI), offers exposure to a market cap-weighted version of the MSCI All Country World Index. That fund is one of the most popular in the Global Equities ETFdb Category with about $1.5 billion in assets. Generally, equal weight ETFs offer enhanced diversification relative to market cap-weighted products, since the largest companies aren’t able to dominate the underlying portfolio. The S&P 500 SPDR (SPY), for example, allocates about 18% of its assets to the top ten holdings. For the equal-weight Rydex alternative, that percentage is closer to just 2%.
There is a similar difference in EWAC compared to the cap-weighted product. The top ten holdings of ACWI make up more than 7% of holdings, while the top ten holdings of the index underlying EWAC make up just 0.4% of the portfolio. There is also a considerable difference in the country allocation between the two funds. ACWI’s top ten holdings include eight U.S.-listed companies, and U.S. stocks make up more than 40% of the underlying portfolio. The U.S. makes up just about 25% of the equal-weighted index, meaning that EWAC will have a more significant allocation to international equities [see How Global Is Your Global ETF?].
“EWAC is designed for investors who seek to invest broadly across the global equity markets,” said Mike Byrum, chief investment officer, quantitative strategies for Rydex, in a press release. “Compared with a traditional cap-weighted index, the equal weight methodology reduces the bias toward the largest constituents and provides broader diversification across all constituents, thereby potentially reducing concentration risk.”
Equal Weight Gaining Ground
In recent years many investors have embraced alternatives to market capitalization weighting, noting that the popular methodology may have a tendency to overweight overvalued stocks and underweight undervalued ones. Equal weighting has become a popular option, as this strategy breaks the link between stock price and weighting and also has the potential to avoid heavy concentrations in a handful of securities [see The Guide To ETF Index Weightings].
In 2010, the performance deltas between market cap-weighted ETFs and those implementing alternative methodologies became quite significant. RSP, which holds the 500 stocks that make up the S&P 500 in equal weights, finished the year up more than 21%–tops in the Large Cap Blend Equities ETFdb Category. SPY, the ultra-popular ETF linked to the cap-weighted S&P 500, gained just 15% on the year. Investors have begun to take note of the impressive performances of equal-weight ETFs; RSP now has more than $3 billion in assets, and many of the recently-launched equal weight funds have begun to gain traction as well.
Disclosure: No positions at time of writing.