DIY Investor Magazine
/
December 2015
49
THE ANNUALISED RETURNS OF THE EQUAL WEIGHT
INDEX (SINCE 2004) IS 9.2 %, COMPARED WITH 6.6%
FOR THE FTSE 100 INDEX
presence of some extremely large oil majors in the
index.
The equal weight version lowers the weighting of the
big majors compared with the standard FTSE 100
Index, which also lowers the weighting of the energy
sector overall. Other sectors, such as consumer
discretionary, get a relatively higher weighting in the
equal weight version of the FTSE 100 Index. So what
does all this mean for performance? No one can
predict future performance, but we did analyse how the
theoretical equal weight index would have performed
historically compared with the FTSE 100 Index. The
graph below shows this performance comparison going
back to 2004.
The annualised returns of the equal weight index over
this time period is 9.2 %, compared with 6.6% for the
FTSE 100 Index. Note however that the equal weight
index underperformed during the 2008 and 2011
market corrections. One important technical feature of
equal weighted indexes is how often they re-balance.
The index has to be re-balanced often enough to stay
close to the equal weighting, but if it re-balances too
frequently then transaction costs could significantly
impact overall returns. The FTSE 100 Semi Annual
Equal Weighted Index re-weights the underlying stocks
every six months (as opposed to, say, re-weighting
quarterly), which our research shows strikes a good
balance between keeping the stocks equally weighted
but without incurring substantial transaction costs for
re-balancing the portfolio.
There is a good chance that more equal weight
ETFs will come onto the market in future, especially
if more investors start to see the potential benefits of
alternatively-weighted indexes. There is a famous quote
by Leonardo da Vinci, which goes: “Simplicity is the
ultimate sophistication.” It is an apt quote in relation to
equal weighted index investing. From a straight forward
idea to a sophisticated methodology to implement that
idea, equal weighting offers an investment solution
that is dramatically different to traditional market-cap
weighted passive investing.
SIMPLICITY IS THE ULTIMATE SOPHISTICATION
Note: Past performance, actual or simulated, is not a reliable indicator of future results. The FTSE 100 Semi Annual Equal Weighted Index has no prior operating history before 1 July
2015. All performance data is simulated and calculated by means of a retrospective application of the index methodology before the live launch date.
