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#1 OEXCHAOS

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Posted 28 December 2006 - 11:08 AM

In re: Your Question



The question was:
"What did the Equal Weight Sectors do in down markets? You showed only up markets in this article
<http://www.tradingmarkets.com/.site/stocks/commentary/chartspotlight/New-Equal-Weight-Sector-Spider-ETFs.cfm> ."




Carl writes back"



The historical data (back to 1999) is also available on StockCharts.com, so you can see for yourself. Generally, equal weight indexes do better in all kinds of markets.

Carl


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#2 89S10

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Posted 28 December 2006 - 11:39 AM

Cap-weighted indexes give more weight to large-cap stocks. With equal weighted indexes, each stock gets a single vote in the outcome. So equally weighted indexes have a small-cap bias compared to capitalization-weighted indexes. Broadly speaking, when small caps are outperforming, equally weighted indexes perform better than capitalization weighted indexes.

#3 Caduceus

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Posted 28 December 2006 - 12:44 PM

Cap-weighted indexes give more weight to large-cap stocks. With equal weighted indexes, each stock gets a single vote in the outcome. So equally weighted indexes have a small-cap bias compared to capitalization-weighted indexes.

Broadly speaking, when small caps are outperforming, equally weighted indexes perform better than capitalization weighted indexes.


Good point but also consider this,
If you believe the markets are not perfectly efficient (which you probably do if you are here). Then by definition with a Cap weighted index you will own more of the securities which are overpriced and less of the securities which are underpriced by the marketplace.

#4 89S10

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Posted 28 December 2006 - 01:50 PM

Yes, excellent point. You get rebalancing with equal weighted indexes where you are always selling stuff that is getting more expensive and buying stuff that is getting cheap. Back to my original idea, equally weighted indexes seem good now because in recent years, small-cap issues have beat large-cap stocks by a wide margin. Over the five years ended November 30th, the Russell 2000 returned about 14.5% a year. In the same time, the return on the S&P 500 was 6.2% per year. Just the opposite was the case in November 1999, when the five-year return was 24.4% for the S&P 500 and 14.8% for the Russell 2000.

#5 traderpaul

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Posted 28 December 2006 - 01:57 PM

This is what I think.....At the end of the bear market, the smart money will buy the big names, the big caps.....Toward the end of the bull market, the late comers will buy the small caps.....When it is time to sell, the small caps will be sold first.....The big names will be sold last......
"Inflation is taking place now. Prices may not appear to be rising because they are making packaging smaller. " Rickoshay