Small Cap Tilts With Equal Weight ETFs

July 24, 2014

Exposure Differences

By taking out the cap-weighting aspect, the equal-weighted ETFs will naturally have smaller-cap skews.

As noted, this is one mechanism an advisor can use to gain a smaller-cap tilt without altering an existing asset class allocation. The degree of the tilt can vary depending on the market-cap segment. I will focus on the large-, mid- and small-cap names from above.

Style Analysis
Market Cap Large Mid Small Growth Value
Equal Weight S&P 500 37.50 96.4 3.6 - 31.3 68.7
Market Cap S&P 500 128.30 99.5 0.5 - 52.2 47.8
Equal Weight Russell 1000 22.99 72.9 26.8 37.1 62.9
Market Cap Russell 1000 113.37 94.8 5.0 52.7 47.3
Equal Weight Russell Midcap 8.60 66.2 33.4 - 45.3 54.7
Market Cap Russell Midcap 11.98 86.5 16.2 - 49.5 50.5
Equal Weight Russell 2000 1.12 - 16.8 82.8 45.0 55.0
Market Cap Russell 2000 1.74 - 38.2 61.7 50.2 49.8

Because the range of market caps defining the large-cap universe is much broader than that of mid- and small-cap universe, equal weighting in large-caps will have a more dramatic effect. Stated differently, the difference in size between the largest and smallest large-cap name will be much wider than the difference in size between the largest and smallest small-cap name.

This effect can be seen in both the market-cap differential as well as the style analysis. Focusing on the equal- versus cap-weighted Russell 1000 from above, the market-cap difference is nearly $90 million. The equal weight also has a larger skew toward the midcap exposure than the market-cap-weighted.

Looking at the style analysis, the equal weight has a nearly two-thirds value and one-third growth split versus the market-cap-weighted—nearly 50/50.


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