Industry Updates

Solactive's 'de-FANGed' equal weight US large cap index

Scott Longley

Weighing into the debate surrounding the concentration of some of the world's biggest companies in the US index is index provider Solactive which has launched an equal weighting US large cap index.

The index of 500 of the biggest stocks by market cap is calculated on the basis of total price return and gross total return. It will be readjusted semi-annually and equally weighted on a monthly basis

The index will be tracked by the Goldman Sachs Equal Weight US Large Cap Equity ETF in the US.

Timo Pfeiffer, head of research and business development at Solactive, told ETF Stream that the index was designed to answer some of the questions that have been posed in recent years by the domination of the S&P 500 and other major US indices by a handful of enormous and largely tech-related companies.

The dominance of the so-called FAANGs - Facebook, Apple, Amazon, Netflix and Google (Alphabet) - has been causing concern with regard to the degree to which ETF and passive investors have increasing amounts of their investments concentrated in just a few well-known names.

"An index that distributes weight equally across all stocks significantly reduces exposure to just a handful of large companies, thus providing less concentration of holdings into the larger stocks," says Pfeiffer.

"For instance, currently the weights of the largest 50 stocks in the Solactive US Large Cap Index make up almost 50 percent of the total index weight (i.e. a significant concentration), while the weights of 50 stocks in the Solactive US Large Cap Equal Weight Index aggregate to only 10%. The same aspect is true in terms of sector concentration and the potential risks associated with it."

The aim of an equal weight portfolio is to capture a broader diversification while also increasing the exposure to smaller stocks at the expense of the large ones. Thus, in market environments where smaller stocks perform better, equally-weighted indices will also benefit from the lower-cap skew.

"Another aspect of equal weighting is that this approach can effectively be seen as some sort of trading strategy," Pfeiffer says. "A disciplined rebalancing in which profits of stocks that did better are reinvested in those that did less well."

He adds that such strategies are already popular, pointing to the Guggenheim RSP ETF, a similar equal-weighted approach launched already in 2003, which has attracted more than $13.6bn in assets under management as of today.


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