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Portfolio > Portfolio Construction

The Equal Weight Evangelist

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Tony Davidow has a tough job. As the new ETF strategist for Rydex|SGI, he’s tasked not only with getting the word out on the company’s view of the ETF space, but also the benefits of equal weight investing.

“Growth over the last several years has been fueled by demand from investors who are seeking a more efficient and effective way of gaining exposure to various market segments across sectors and geography,” Davidow says. “Equal weight investing (versus traditional cap weighting) is one way to do that.”

Davidow joined Rydex|SGI in December 2010 from IndexIQ, where he was head of distribution. Before that, he was a managing director at Morgan Stanley, where he ran sales and training operations for the consulting side of the business and built CSG University Program, the consulting group’s training program. He’s also worked for the American Stock Exchange and Graystone Wealth Management.

With that level of experience, it’s safe to say he knows of what he speaks, and education is a core part of his communication strategy. He’s written numerous white papers (read one at and speaks often on topics such as core-satellite investing, asset allocation, international investing and alpha-beta separation, among others.

“If you think of the S&P 500, what a lot of people don’t realize is the way that they own those 500 stocks,” Davidow says, when asked specifically how he brings his message to the masses. “It’s very top heavy. The top 10 names represent 20% of the index. The top 50 names represent 50% of the index. It’s concentrated on a handful of names. A lot of investors don’t realize that. They just assume that the S&P is the market, and that’s what they own.”

This tilt, he explains, favors large, mega-cap names. So, as the name suggests, equal weight takes those same 500 names, but rather than overweight the biggest ones, an equal weight is applied across them all. Although Rydex has utilized the approach for some time, it’s only recently that they’ve added ETF components.

“The first index fund in 1971 was, in fact, equal weight,” he says. “The idea of equal weighting or an alternative way of going into market has been out there for a while, but there really haven’t been commercially available investment solutions. Rydex offered the solution in 2003, and we’ve had great results. In 2006, we offered sector strategies. In December and January of this year, we expanded the family once again and offered six additional equal weight ETF strategies.”

While reluctant to take up the ETF versus mutual fund debate (since both, he says, have a place in the portfolio), he likes the ETF structure because it means investors of all sizes and sophistications can own the market in an equal weight fashion. One of the compelling arguments with the equal weight S&P story previously referenced, he says, is that relative to the cap weight equivalent, equal weight has delivered superior results—not surprising given the reduction in concentration risk.

“When you’re allocating more evenly across the portfolio, you’re in a position to have the smaller names contribute more to the results,” he adds. “But what often gets glossed over in the equal weight debate is to retain the integrity of the process by dynamically rebalancing on a quarterly basis. By doing so, we’re applying investment discipline that forces us to trim those names and sectors that have appreciated the most in the portfolio, and then to buy those that perhaps are underappreciated and undervalued in the portfolio. And that’s central to our equal weight process.

So what, specifically, makes Rydex an overlooked manager in this space?

As one might guess, it’s still new, and as a consequence not recognized or understood in the marketplace. However, he does note Rydex has close to $8 billion in assets attributed to the equal weight space, which makes them a relatively big player even if the space itself has yet to grow.

“The market has just generally accepted cap weighting as the way of owning the market,” he says. “It’s really been in the last couple of years that people have spent more time thinking about alternative ways of owning the market.”

So how is he addressing this cap weight bias? With a significant investment in education: Education in the form of white papers; education in the form of having a high profile at industry conferences; education in specifically pointing out what is unique about the equal weight investing process.

What about advisor skepticism and pushback?

“A lot of them are actually very surprised at how well it performs and what a simple message it is,” he counters. “It’s very intuitive. We did a web seminar and had over 1,000 people listen in. We spoke at TD Ameritrade’s institutional conference and it was standing room only. We’re finding that people are very much intrigued with the idea and want to better understand it. We have a track record that goes back to 2003 on which to build. We have a significant period of time to evaluate the results and they’re pretty compelling. We’re trying to build on that success and tell the story; one that’s sound and repeatable.”

And he believes the recent economic downturn has only helped with that story. Investors are more skeptical in the wake of 2008, and more open to new investing ideas that deviate from traditionally held views. Are there betters ways of getting exposure to the market? Are there different ways of thinking about investing?

“The other thing that I think we did start to talk about is you’ve seen the extraordinary growth in the ETF industry. I think that is going to continue over time because people are looking at the best way of building portfolios, and ETFs are very simple, elegant, cost-effective solutions.”

But when the issue of overcapacity is raised—especially since those with less than $50 million in assets under management typically don’t survive—and the threat it raises, Davidow doesn’t buy into it in this case, since equal weight strategies are so innovative.

“What we’re doing is we’re challenging the norm,” he says. “We’re not just doing it in one single solution. We’re, in fact, challenging conventional wisdom and saying the equal weight philosophy actually works across the globe. We’ve also taken that methodology and we’ve looked up and down the cap spectrums. It can operate in a Russell 1000 environment, which is a large-cap product; a Russell 2000 environment, which is small-cap product and a Russell mid-cap environment. I’ll tease you a little bit and say we’re looking at additional strategies that we’d like to offer in the remainder of the year. We are big believers in equal weight. We are committed to it. And to the extent we experience similar results, we want to offer additional strategies for the investing public.”    

John Sullivan can be reached at [email protected].


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