Not All ETFs Are Created Equal (Weighted)

This article was originally published on ETFTrends.com.

In this week’s TETFindex update, we focus on ETFs that employ the equal weighting (EW) methodology.

Equal weight is a type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund, and the smallest companies are given equal weight to the largest companies in an equal weight index fund or portfolio.

This may be the simplest form of alternative weighting or smart beta indexing, and also a quite successful one in terms of asset growth.

Today, there are 162 EW ETFs with $72B in assets. The biggest is RSP with $15Bn in assets representing 21% of EW assets. Considering the natural simplicity of EW, some investors may find it surprising that this has been a driver of ETF growth.

Top Ten EW ETFs

EW ETF CLIENT ALIGNMENT GROWTH FACTORS

Financial academics have cited for many years that traditional market cap weighting unintentionally promotes momentum, growth and large-cap factors. Meanwhile, EW is a straightforward, transparent way of mitigating those factors while systematically promoting the value and size factors.

Out of the 162 EW ETFs, 63 are alternative versions of traditional indexes representing 73% of EW assets. The average weighted expense ratio for these EW ETFs is 0.41% vs 0.22% for the overall ETF ecosystem. This simple weighting system has supported ETF growth and innovation for many years.

EW ETF INNOVATION GROWTH FACTORS

The other 99 EW ETFs focus on innovations like dividends, themes, and business characteristics. These ETFs have an average expense ration of 0.50%. We believe this will be the future driver of ETF growth. There are 24 EW ETFs focused on dividends, and more specifically, EW often enhances dividend yield. Even more interesting, thematic ETFs have been a huge growth driver of ETFs and many have embraced an EW methodology.

NUMBER OF EW ETFs BY OBJECTIVE

[caption id="attachment_222293" align="aligncenter" width="600"] Source: Toroso Research[/caption]

NUMBER OF EW ETFs BY SECTOR/THEME

Since many of these global growth themes are very new, market cap weighting would ignore many of the key small-cap pure plays. Therefore, EW makes a lot of sense for capturing better thematic exposure.

EW CHARACTERISTIC FOCUSED ETFs

Finally, there are the ETFs that focus on business characteristics, which we have written about in previous research.

We believe ETFs that target a business characteristic, which have traditionally only been accessed by active managers, will continue to be a spectacular growth driver for the future.

Here is a list of the EW Characteristic focused ETFs:

VanEck Vectors Morningstar Wide Moat ETF MOAT
Knowledge Leaders Developed World ETF KLDW
VanEck Vectors Morningstar International Moat ETF MOTI
Goldman Sachs Hedge Industry VIP ETF GVIP
Guggenheim Insider Sentiment ETF NFO
Global X Guru Index ETF GURU
Cambria Foreing Shareholder Yield ETF FYLD
Elements Morningstar Wide Moat Focus Total Return Index ETN WMW
Cambria Emerging Shareholder Yield ETF EYLD
SPDR S&P 500 Buibackk ETF SPYB
VanEck Vectors Spin-Off ETF SPUN
Global X Founder-Run Companies ETF BOSS
Brand Value ETF BVAL
USCF SummerHaven SHPEN Index Fund BUYN
USCF SummerHaven SHPEI Index Fund BUY

JUST WEIGHT

It seems that EW is underappreciated because the ideal weighting just can’t be that simple, right? Well for many focused, characteristic, and thematic ETFs, equal weighting is the primary methodology. For traditional exposures, EW can provide different factor exposure and returns. For example, since 2003 when RSP opened, it has returned almost 400% while the S&P 500 is up just over 300%. Which leads us to conclude with a quote by Leonardo Da Vinci: “Simplicity is the ultimate sophistication.”

This article was written by Toroso Asset Management, a participant in the ETF Strategist Channel.