%0 Journal Article %A Dodd F. Kittsley %T An Analysis of Indexing at the Industry Level %B Market Cap versus Equal Weighting %D 2006 %J ETFs and Indexing %P 67-73 %V 2006 %N 1 %X The topic of index weighting has gained increasing popularity in the financial press of late. In particular, the financial services industry fueled in part by exponential ETF growth, finds itself struggling to comprehend an ever-widening array of indexing methodologies. This paper endeavors to discuss the merits of equal-weighted indexes in contrast to their more common market cap-weighted counterparts. Key distinquishing features of equal-weighted indexes are that they employ an equal-weight methodology and rebalance quarterly—two features which continue to garner significant inquiry from the investment community. More specifically, equal-weighted indexes address concentration issues that may arise when investing in narrow market segments like sectors and industries. Such indexes are designed to provide pure exposure to an industry or group of industries, as defined by the Global Industry Classification System (GICS). In our view, the broader diversification through equal representation offers investors a way to implement top- down industry views in a pure way that is largely unfettered by single stock risk. In other words, equal-weighted indexes have less company specific risk and overall industry fundamentals are more accurately reflected. From a practical standpoint, equal-weighted indexes are also excellent candidates for investable products in the form of ETFs because they are compliant with IRS diversification requirements for registered investment companies (no security can have a weight greater than 25% and all securities with greater than a 5% weight together may not exceed 50%). Such rules all but preclude market cap-weighted ETFs based upon narrow market segments; at least those not relying heavily upon optimization (resulting in correspondingly elevated expected levels of tracking error). %U https://guides.pm-research.com/content/iijetfind/2006/1/67.full.pdf