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NEW EQUAL WEIGHT ETFs
COMPLIMENT SECTOR SPIDER
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
December 20, 2006
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In November, nine new
equal weight sector ETFs began trading. They are sponsored by Rydex, and
they are counterparts to the original nine Sector Spiders that are
composed of the stocks in the S&P 500 Index. I have been a long-time
and enthusiastic advocate of equal weighted indexes because they truly
allow you to spread your risk equally among all the stocks in the index,
and I am very pleased to see these newest trading vehicles become
available. Let's take a moment to explain what an equal weighted index
is.
Most market/sector indexes are weighted by capitalization, which means that the largest cap stocks exert the most influence on the price movement of the index. For example, I once examined the S&P 500 Index and found that the top 50 stocks (ranked by market cap) actually represented about 70% of the entire S&P 500. What this means is that the remaining 450 stocks have very limited influence on the index. In the case of these new equal weighted sector ETFs, each stock in the sector is initially given an equal weight in the index, and re-balancing takes place on a quarterly basis. In addition to avoiding overexposure to the larger-cap stocks in the index, equal weight indexes usually perform better than their cap-weighted counterparts. This is because the smaller-cap stocks, which usually perform better than larger-cap stocks, have a heavier weight in the index. In the charts below I have arranged the nine sectors in alphabetical order. The regular Spiders are on the left, and the equal weight ETF versions are to their right for comparison. The PMO (Price Momentum Oscillator) is one way to measure relative strength -- higher numbers reflecting higher strength. I have circled the highest of the two PMOs in red. Note that eight of the nine equal weight ETFs are stronger than their cap-weighted Spider counterparts. I should note that we have constructed simulated data for several years prior to the time the new ETFs started trading in November. These data were adapted from back calculations of the sector indexes, and they should be a fairly accurate calculation of how the equal weight sector ETFs would have actually performed. This simulated data will allow us to make intelligent technical trading decisions without having to wait for actual data to accumulate.
The new ETFs are currently very thinly traded, but this should change as soon as they have been "discovered".
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