Equal-Weighted Success Varies

November 25, 2013

Equal-weighted ETFs are popular in some segments, but the farther from the core you get, the less attractive they become.

Given the success of the Guggenheim S&P 500 Equal Weight ETF (RSP |A-74), which has amassed an impressive $6 billion in assets, it’s a wonder Guggenheim has had such a hard time marketing a similar equal-weighted strategy focused on the emerging markets.

The Guggenheim MSCI Emerging Markets Equal Weight ETF (EWEM | F-77) has definitely failed to attract assets—less than $10 million in three years. Maybe it’s because of the nature of the equal-weighting methodology, and I’ll explore that below.

The question is all the more pressing to the extent that emerging market equities ETFs—in the aggregate—have pulled in $110 billion of the $1.6 trillion now invested in U.S.-listed ETFs.

The fact is, when most people think of emerging market equity ETFs—and what most people invest in—is either the Vanguard FTSE Emerging Markets ETF (VWO | B-85) or the iShares MSCI Emerging Markets ETF (EEM | B-96). The two products account for 90 percent of the assets in emerging market equity ETPs. They attract more than $3 billion in volume most days. There’s nothing wrong with that.

By comparison, the rest of the emerging market equity universe gets $100 million in daily volume, combined. VWO and EEM can be traded cheaply—and in VWO’s case, commission free on Vanguard’s platform. The two funds are the de facto tools for institutional investors and retail traders alike.

Still, apart from Guggenheim’s EWEM, other noncore developing-market-focused strategies, such as the factor-focused $2.6 billion iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV | B-62) and the $400 million “fundamental” PowerShares FTSE RAFI Emerging Markets Portfolio (PXH | C-63), have managed to build big, stable asset bases.

It doesn’t help that since inception, Guggenheim’s EWEM has lagged its cap-weighted peers. Still, the template is there for EWEM to succeed; namely, RSP.

RSP has proven that taking a wildly successful ETF—the “granddaddy” of them all, the SPDR S&P 500 ETF (SPY | A-99)—and offering it up in an equal-weighed strategy, is doable.

EWEM basically takes EEM’s holdings and equal-weights them, much like RSP does with SPY’s portfolio.

While there may be something to my colleague Dave Nadig’s recent assertion that RSP’s outperformance will fade, EWEM could be in the opposite position.

Given its increased weighting to smaller firms and its smaller-cap profile due to its equal-weighting scheme—EWEM has an average market cap of just $16 billion compared with $50 billion for EEM—EWEM should have greater leverage to an emerging-market rebound following the sharp sell-off in spring.

In fact, during the recent three-month mini-renaissance for emerging markets ETFs, EWEM has slightly outperformed the cap-weighted view of the market. Interestingly, it has managed to do so with a beta to the Investable Market Index of less than 1.


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