The Case For The Equal Weighted ETF ‘EQAL’

March 13, 2015

 

Sector Market Cap S&P 500 Market Cap Russell 1000 Equal Weight S&P 500 Equal Weight Russell 1000
Consumer Discretionary 12.52 13.04 17.02 10.69
Consumer Staples 9.69 8.90 7.81 11.04
Energy 8.02 7.49 8.63 11.09
Financials 16.16 16.97 16.64 10.16
Health Care 14.76 14.37 11.49 11.78
Industrials 10.31 11.09 12.76 12.32
Information Technology 19.92 19.43 12.93 13.48
Materials 3.25 3.58 6.06 9.19
Telecommunication Services 2.28 2.13 1.20 2.30
Utilities 2.93 2.92 5.45 7.94

 

Sector Market Cap S&P 500 Market Cap Russell 1000 Equal Weight S&P 500 Equal Weight Russell 1000
Consumer Discretionary 14.16 14.66 18.21 11.40
Consumer Staples 8.50 7.86 7.02 10.88
Energy 8.05 7.53 8.91 11.57
Financial Services 17.84 18.78 18.56 11.06
Health Care 14.71 14.27 11.29 11.53
Materials & Processing 3.60 4.05 6.63 11.12
Producer Durables 10.58 11.19 12.76 10.98
Technology 17.21 16.61 9.97 11.33
Utilities 5.21 4.97 6.66 10.14

 

The equal-weight Russell 1000 underweights the financials and consumer discretionary sectors while overweighting utilities and staples relative to the other three indexes. While this could be beneficial at times and detrimental at others, having the uniform weighting can take a sector-timing question out of the equation.

Performance

An important factor for me when comparing indexes isn’t only looking at performance, but at downside protection and recovery periods. Using the same four indexes as before, here’s a look at performance starting at the market peak in November 2007 through February 2015.

 

  Market Cap S&P 500 Market Cap Russell 1000 Equal Weight S&P 500 Equal Weight Russell 1000
Return 6.58% 6.81% 9.14% 9.96%
Sharpe Ratio 0.37 0.38 0.44 0.47
Max Drawdown 50.95% 51.13% 53.77% 50.82%
Recovery Length 37 37 22 20

 

While outperforming the other indexes, the equal-weight Russell 1000 had a better maximum drawdown number, and was able to recover from that drawdown faster than the other indexes.

 

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