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.

As a result, the S&P 500 EWI is overweight relative to the S&P 500 in sectors that contain stocks that are — on average — smaller than the average stock in the S&P 500 and the index is underweight in sectors that contain larger-than-average companies.

The S&P 500 EWI is rebalanced quarterly to keep it at the original equal weight, and this leads to higher turnover. The 22 percent turnover of the S&P 500 EWI seems high in comparison to the 4 percent turnover of the S&P 500, but it is right in line with the 20 to 25 percent average for alternatively weighted indexes.

David Blitzer, senior manager at Standard & Poors, noted that in the 10 years through 2006, the equal-weighted S&P 500 outperformed the cap-weighted S&P 500 by 3.2 percentage points a year. Below are more recent performance numbers: o One Year: S&P 500 (+5.5%), S&P 500 EWI (+1.5%) o Three Years: S&P 500 (+8.6%), S&P 500 EWI (+8.3%) o Five Years: S&P 500 (+12.8%), S&P 500 EWI (+15.9%)

Reach Ron DeLegge at www.etfguide.com.