Equal Weight Indexing - Five Years Later

17 Pages Posted: 4 Jan 2009

Date Written: April 2008

Abstract

The introduction of the S&P 500 Equal Weighted Index (EWI) in January 2003 pioneered the subsequent development of noncapitalization weighted indices catering to investors who question market efficiency. Equal weighting is factor indifferent. It randomizes factor mispricing and is thus an attractive option for proponents of the theory that the market is inefficient and at times, misprices factors. The S&P 500 EWI has different properties than the S&P 500, including a lower concentration of individual stocks and slowerchanging sector exposures. The S&P 500 EWI has outperformed the S&P 500 since its inception. The level of outperformance has varied considerably under different market conditions. The outperformance of the S&P 500 EWI is a result of the differing weighting and rebalancing processes. In terms of risk factor exposures, a complex and dynamic combination of size and style risk factors have contributed to the difference in returns. It may be difficult to replicate S&P 500 EWI return outcomes through a simplistic combination of style and sector indices. Equal weighting also demonstrates long term outperformance internationally. Criticism of equal weighted indices has centered on additional turnover and increased capacity constraints relative to market capitalization weighted indices. While true in abstract theory, neither is a serious hurdle in practice.

Keywords: equal weight indexing

JEL Classification: C52

Suggested Citation

Dash, Srikant and Loggie, Keith, Equal Weight Indexing - Five Years Later (April 2008). Available at SSRN: https://ssrn.com/abstract=1321726 or http://dx.doi.org/10.2139/ssrn.1321726

Global Research & Design S&P Dow Jones Indices (Contact Author)

S&P Dow Jones Indices ( email )

New York, NY 10041
United States

Srikant Dash

Standard & Poor's ( email )

London EC2M 7NJ
United Kingdom

Keith Loggie

Standard & Poor's ( email )

London EC2M 7NJ
United Kingdom

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