Equal weight indexes are the simplest type of alternatively weighted indexes. By comparison with the standard index construction method of capitalization weighting, in which constituents’ weights are determined by their respective market values, an equal weight index is indifferent to a stock’s market value. Instead, constituent weights in an equal weight index are equalized at each rebalancing point. Additionally, equal weighting an index by sector then by constituent has historically produced excess returns.
In this FTSE Russell Insights we review some of the theory behind alternative weighting, highlight the recent increase in popularity of equal weighting and outline the innovative equal weighting methodology used for the Russell 1000® Equal Weight Index, in which both sector- and stock-specific risks are mitigated. We examine the resulting performance attributes of an equal weight index.
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