ETF Talk

Equal Weighting and Systematic Rebalancing Define This Fund

This week’s exchange-traded fund, Guggenheim S&P 500 Equal Weight ETF (RSP), uses an equal-weighting strategy to build its portfolio.

In fact, as probably the best-known equal-weighted ETF on the market, RSP simply takes all the stocks in the S&P 500 and weights them equally, disregarding the market caps of the stocks. As a result, RSP is biased toward the smaller caps in the S&P500 index compared to other similar funds, resulting in a higher beta, or volatility.

However, this strategy also lowers concentration and thus reduces the risk of failure from any one single stock. RSP specifically employs a disciplined rebalancing system.

The EFT assesses and balances its portfolio on a quarterly basis, at which time it employs a contrarian strategy of selling the winners and buying the losers. This strategy is aimed at reallocating the fund’s assets from outperforming to underperforming stocks and market segments, which may provide an opportunity to improve long-term performance.

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