S&P 500 ETFs: Market Weight Vs. Equal Weight

Published on Friday, 23 March 2012 09:46 Written by Ken Hawkins

In January 2003, the S&P 500 Equal Weight Index (EWI) was created. As the name implies, this is an equal weight version of the popular S&P 500 Index. Although both indexes are comprised of the same stocks, the different weighting schemes result in two indexes with different properties and different benefits for investors. There are also exchange-traded funds (ETFs) that track each of the two indexes. The Rydex S&P 500 Equal Weight ETF (NYSE: RSP) tracks the EWI; the ETF of choice for the S&P 500, is the State Street SPDR S&P 500 (NYSE: SPY).

Let's take a look at each type of index, the ETFs that track these indexes and how the type of weighting of the index you choose can affect your investments.

Indexes 101

Similar to many stock indexes, the S&P 500 is a market capitalization weighted index. The market capitalization of each stock is determined by taking the share price and multiplying it the number of shares outstanding. The companies with the largest market capitalizations, or the greatest values, will have the highest weights in the index. The weight of a company in the index is equal to the market cap of that company divided by the total market cap of all the companies in the index. For example, in March 2012, the total market cap of the S&P 500 was $12.7 trillion. The largest company in the index was Apple (NASDAQ: AAPL), with a market cap of $546 billion. Its weight in the index therefore was 4.3% of the total index.

An equal weighted index is just as it sounds. Every stock in the index has the same weight, regardless how large or small the company is. Therefore, even Apple will have the same weight (0.2%) as the smallest company that is a constituent in the S&P 500.

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