Beating the S&P500 With an Equal Weight ETF
Dan Pritch submits:
Over the years, there has been much debate in the investment community over an equal-weighted index vs. weighting by market cap or share price. There are pros and cons to each method of weighting. For instance, while the S&P500 is comprised of 500 stocks representing a broad swath of sectors in the US, the top 10 holdings represent 19% of the total index weighting (2% of stocks represent 19% weighting for an almost 10X “over-representation”).
Case in point: ExxonMobil (XOM) comprises over 3% of the weighting alone due to its market capitalization. Therefore, if ExxonMobil experiences an undue calamity (Valdez II?), the S&P500 index may be unfairly maligned by a single holding that isn’t representative of the over 3% of the US Stock Market as a whole. The Dow Jones Industrial Average actually weights its components by share price, which is even more archaic.
Investing, Long Term Investment, stock market | admin March 17, 2010
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