Equal weighted Index comprises of a set of publicly traded companies which are given equal importance irrespective of other parameters. In a contrarian basis, for index rebalancing a well performing stock is sold to buy the weakly performing stock.
Unlike most of the funds, equally weighted index provides equal importance to all kinds of stocks. Small cap stocks are overly contributed, large cap stocks are the least because of the size. Returns from the large cap stocks contribute less and hefty dividends are lessened due to a weaker allocation towards matured businesses. Apart from this, every stock is invested the same amount and rebalanced quarterly or in an annual basis.
Momentum is the factor which makes the portfolio deviate from being the ideal. Opposing the rule, keep the good players and shed the rest, the stellar performers are sold to rebalance to the equal weighting index.
The well diversified portfolio carries less risk compared to concentrated small or mid cap funds. Analysts go for value based investing, which is proved to be highly profitable, on the other hand growth stocks move with larger amplitude inflating the rebalancing cost.
The disadvantages of index funds are, absorbs most of the management fees in rebalancing the portfolio, often the rebalance more accurate to the theoretical model. Small cap stocks are given higher weightage therefore an equally weighted portfolio is moderately risky. It is said that the equal weighted index have outperformed the major index and historical returns proving them.
What are some of the equal weighted index funds in India?
- Sundaram Smart Nifty 100 Equal Weighted Fund,
- Principal Nifty 100 Equal Weighted Fund,
- Adithya Birla Sun Life Nifty 50 Equal Weighted Index Fund.
Is s&p a equal weighted Index?
S&P 500 is a market capitalized index covering top 500 public companies trading in the USA listed on the New York Stock Exchange or NASDAQ. 500 top stocks valued at US$ 32 trillion as of June 2021.