Rydex Investments just celebrated the fifth anniversary of its innovative Rydex S&P Equal Weighted ETF (RSP).
The fund, which is based on the S&P 500 Equal Weighted Index (EWI), was among the first group of ETFs to introduce an alternative weighting methodology.
RSP contains the same companies within the S&P 500, but instead of weighting them by market capitalization, each stock is assigned a 0.20 percent equal weighting. The equal weighting method has proven popular: Assets linked to the S&P 500 EWI grew from $2.3 billion in 2003 to over $10 billion in 2007.
Prior to the EWI, and ever since the introduction of the S&P 500 in 1957, market-capitalization weighting had been the prevailing strategy. The equal-weight nature of the index results in a few large cap stocks being underweight (i.e. Exxon), and many small cap stocks being overweight (i.e. E-Trade).
The individual weighting of stocks in turn affects the sector weighting within the index. The weight of each sector in the S&P 500 depends on the total market cap of the stocks in that sector relative to the market cap of the entire index. The S&P 500 EWI sector weighting, however, is determined by the number of stocks in each sector in the S&P 500.