As an alternative to traditional market-cap weighted exchange traded funds, an equal-weight ETF has provided a simple and attractive investment strategy through disciplined indexing methodologies.
ETF Trends’ Tom Lydon sat down with Craig Lazarra, global head of index investment strategy at S&P, to discuss benefits of an equal-weight index methodology.
“Equal weighting, as the name implies, is a strategy where instead of having 500 stocks weighted by capitalization, you take all 500 and put 1/500th of your portfolio in each stock, Lazarra said.
“Over time, equal strategies have tended to outperform cap-weighted strategies,” Lazarra added.
For instance, the Guggenheim S&P 500 Equal-Weight ETF (RSP) has generated an average annualized return of 9.4% over the past 10 years, whereas the S&P 500 index gained an annualized 7.5%. Year-to-date, RSP is up 29.5% while the S&P 500 increased 26.4%. [Why Equal Weight ETFs Outperform Traditional Benchmarks]
Lazarra attributes the outperformance to three factors: average capitalization of equal-weight portfolios are less than cap-weighted counterparts, equal-weight portfolios typically lean toward value over growth and the index rebalances by selling winners and buying losers in a market where mean reversion occurs.
Watch the video below to see the full interview with Craig Lazarra.
To view past video interviews, visit our videos section.
- investment strategy